I have started to invest very recently and I am already reaping the benefits of it. I read a lot of articles / blogs about personal finance on different sites and in this blog I want to disclose the best advise I ever read on personal finance (Note: I am following this advice).
This advice is for you if you don’t want to learn about investing but still can invest and compound without much hassle. Let’s dive into the topic😃
What is a mutual fund?
For today’s topic it is necessary to know what a mutual fund is. I will give a brief about it.
Mutual funds are money collected from common people like us and high net worth individuals as well in order to invest and compound it. The money collected is put into stock market on behalf of us. We are entrusting our money to a mutual fund house(SBI, ICICI, HDFC, UTI etc) so that they will choose the stocks on behalf of us and invest our money and grow it. For doing this they charge us a nominal fee in the name of expense ratio. I can keep on writing about mutual funds but this is enough for today’s topic.
SIP - What is SIP?
SIP is Systematic Investment Plan. You might have heard about it and might also be doing an SIP. SIP is basically investing in mutual funds at regular intervals(usually every month after your salary is credited). I am hoping you get an idea of what mutual fund is and I am planning to write in detail about it in a separate blog. SIP helps us to switch from spend first and save next —> save first and spend next mode.
Magic of SIP
You can see the magic of SIP only if you have discipline in investing. Every month you need to save a certain amount and you need to continue this habit for few years and it may be based on your goals as well.
For example, your age is 30 and you want to retire at 55, I assume that you can save 5k per month without a second thought. So I would advice you to start a SIP in an index fund and put this 5k every month without fail till you retire i.e 25 years. Your next question would be what will happen if I do this? Read on..
There are tons of online SIP calculator out there in the internet and I have taken grow SIP calculator and calculated the above scenario considering the rate of return as 10 - 12%.
The below image shows us considering the monthly investment as 5k and rate of return as 10%. Your wealth would be 66L by the end of 25 years.
The next image will show you the wealth created considering the monthly investment as 5k and 11% as rate of return. Your wealth would be ~80L by the time your age become 55.
The third image shows us with the monthly investment as 5k and rate of return as 12%. You would be having nearly 95L at the end of 25 years of compounding.
You can always increase or decrease the amount based on your capability to save. Just another screenshot is given below by making the monthly investment as 10k. Although you would be paying 10% tax for the wealth gained, it is still worth it. I bet you that you can’t gain this much just by putting your money in FD. Imagine, getting approx 2 crores after 25 years just by investing 30 lakh is cool right?
The next is a bonus screenshot to make you understand why starting early will make your money 10x. Imagine you started at the age of 25 and you invested 10k every month without fail till you become 55(30 years). This would have earned you approx 3.5 crores considering the rate of return as 12%.*
Why Index funds and what is an index fund?
I actually wanted to cover this topic also here but now it seems that the article will become too large and difficult to consume. So I will write about index funds in detail in my next article and the risks associated with it and why I am recommending to put your money in an index fund. Also, I will disclose the apps I use for investing in mutual funds. Until then stay tuned and have a safe Diwali.
*Rate of return is not always fixed and I assumed 10 - 12% return based on the history of mutual funds.
Have you invested in any mutual funds? Let us know in the comments about your investing journey.
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