Q: My financial goal is to reach Rs 1 Crore in 10 years and I am planning to do this by investing an initial amount of Rs 5 Lakh through mutual funds with India booming and great scope for foreign investments ahead in the coming years, I would expect average annual returns of 25% or more in mutual funds.
Can I achieve my target with financial planning?
If not, please let me know the capital amount needed to achieve my target considering the current economic scenario and performance of the index.
A: You can reach your target, but your smart financial plan requires some modification.
First of all, we believe that the correct expectation for long-term return in equity funds is 14-16% per annum. Markets can be volatile in the short term and thus, reliably correct returns tend to be in the 14-16% range rather than a best case range of 25% or more. Good actively managed equity funds tend to do better, on average, than the index.
Having understood returns, you should look at more likely scenarios rather than best case scenarios to reach financial goals with greater confidence.
To achieve Rs 1 Crore in 10 years, you will have to start with more than Rs 5 Lakh, approximately Rs 27 Lakh. Alternatively, start with the money you have and invest more money every year.
The alternate approach we would look at is to:
#1. Start with Rs 5 Lakhs
#2. Start investing an additional Rs 20,000 every month so you invest a total of Rs 2.4 Lakh at the end of the first year.
#3. Increase the amount you save by 15% every year, so the investment amount changes to Rs 23,000 per month from the second year. This investment figure keeps on going up for the rest of the duration. You are also likely to receive an increment each year which can help you raise your investment capital every year.
The end result should be the same as starting with a higher capital amount of Rs 27 Lakhs. Assuming that fund returns are in the 14-16% range, you should be able to reach your goal of Rs 1 Crore by the end of 10 years.
Here is a calculator where you can check how much you need to invest in 10 years to reach a particular corpus. You only need to add, in the relevant cells, your initial investment, your monthly investment figure, and by what percentage you intend to increase your monthly investment each year.