By starting early, being disciplined, and increasing investments annually, one can harness the power of compounding and long-term investing.
Compounding is the key to turning small, consistent investments into significant wealth.
For most middle-class Indians, retiring with ₹51 crore might seem an unattainable goal. Imagine a 23-year-old earning ₹60,000 monthly and saving ₹22,000 — 37 percent of the income — for her retirement. This requires short-term sacrifices but lays the foundation for long-term wealth. With consistent savings, a 10 percent annual increment in contributions, and a 12 percent CAGR, the person can reach her goal by age 60.
The journey begins with ₹22,000 in monthly SIP contributions, growing by 10 percent annually to reflect salary increments.
Over 37 years, this disciplined approach transforms modest savings into a massive corpus. Here’s how:
• 12th month (1st year): starting with ₹22,000 per month, the portfolio grows to ₹2,81,805, including ₹2,64.000 in contributions and ₹17,805 in returns. The impact of compounding is visible even in the first year.
• 120th month (10th year): by the 10th year, contributions increase to ₹51,875 per month. The portfolio value reaches ₹74,23,518, with compounding driving significant growth.
• 240th month (20th year): in the 20th year, monthly SIPs rise to ₹1,34,550, and the portfolio value soars to ₹4,37,55,174. Compounding begins to dominate as reinvested returns outpace new contributions.
• 360th month (30th year): by the 30th year, monthly SIPs reach ₹3,48,988, and the portfolio crosses ₹19,43,50,719. At this stage, compounding becomes the primary driver of growth.
• 444th month (37th year): at retirement, monthly contributions peak at ₹6,80,079, and the portfolio value reaches ₹51,39,39,722. Compounding over this extended horizon makes the dream of ₹51 crore a reality.
Realistic returns and incremental SIPs
This journey assumes a 12 percent CAGR, slightly below the Sensex’s historical 13+ percent annualised returns, making it realistic and achievable. The 10 percent annual increment in SIP contributions ensures the plan keeps pace with rising income and inflation, enabling the investor to achieve this extraordinary goal.
Early pain for long-term gain
Committing ₹22,000 out of a monthly income of ₹60,000 may feel restrictive for a 23-year-old just starting her career. However, this early sacrifice brings significant rewards:
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• Short-term adjustments: living on ₹39,000 encourages disciplined spending and prioritisation of financial goals.
• Long-term rewards: the early contributions and long investment horizon magnify the benefits of compounding.
Adjusting for inflation
Inflation reduces the real value of money over time. Assuming 6 percent annual inflation on average, ₹51,39,39,722 crore in 37 years is roughly ₹5.95 crore in today’s value. Here’s how this plan addresses inflation:
1. Annual SIP increments: the 10 percent yearly step-up ensures contributions outpace inflation.
2. Equity focus: equity mutual funds tend to outperform inflation over the long term.
3. Realistic planning: even with inflation, ₹5.95 crore provides significant purchasing power and financial freedom.
Rupee cost averaging
SIPs take advantage of rupee cost averaging, where more units are bought when prices are low and fewer when prices are high. This systematic approach reduces the average cost of investment and minimises the impact of market volatility over 37 years.
Lessons for middle-class investors
1. Start early: the earlier you start investing, the greater the compounding effect. Starting at 23 provides a significant advantage.
2. Be consistent: regular SIPs, regardless of market conditions, ensure steady progress toward financial goals.
3. Increase contributions over time: a 10 percent annual step-up ensures SIPs grow in line with income and inflation.
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5. Have realistic expectations: a 12 percent CAGR ensures that the financial plan is both ambitious and achievable.
6. Seek professional guidance: a financial advisor can help identify suitable funds and optimise investment strategies.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
The author is Founder, True North Finance, a Financial and Investment Planning Firm based in Pune.
LT COL ROCHAK BAKSHI (RETD) is Founder, True North Finance, a Financial and Investment Planning Firm based in Pune.