How to make 6.4 lacs by investing 1000 per month

October 13, 2007

Is’nt the above title like a typical get rich quick scheme ? Frankly there is no magic in the above. The approach is very simple. The NSE or BSE index on an average has returned around 16-17% per annum for the last 10-15 years. So if one can invest via SIP (systematic investment plan) around 1000 Rs per month, it should amount to around 6.4 lacs after 10 years. This is with the assumption that the gain is evenly distributed ( @ 1.4 % per month) across the entire 120 month time period. 

Ofcourse reality is not that convenient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run. 

Let me give a few scenarios (investing 1000/ month)

Return rate                             Terminal value

13%                                          4.3 Lacs

15%                                          5.3 Lacs

17%                                          6.5 Lacs

19%                                          7.9 Lacs

21%                                          9.6 lacs

 

  Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can beat the market by 2-3% point. 

So where’s the catch? well there is none really. The main problem is us. Think of it … where is the sex appeal or sizzle in this strategy. If you discuss this with your friend, do you think you will get anything more than a yawn? Who is going to be impressed with this approach ? 

I know what comes to everyone’s mind (mine included), namely – I am a better investor. I can make 25% per annum and have beaten the daylights out of the market for last 2 years. Who wants this boring strategy, when I can do all kinds of fancy stuff, have fun at it and boast about it too. Maybe its true, but can you be sure? 

So the question is – is it better to follow a known strategy and build a decent nest egg in the next 10-15 years, or try for the moon which may or may not happen. 

I am not different than anyone else and tend to follow both approaches at the same time.  I  prefer not to discount a simple and effective approach. As a result a portion of my portfolio is always indexed and in SIP.

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