Invest in growth assets
By this, we mean an asset class that has the potential to deliver higher returns over long-term. Equity is one such asset class. Over long term, equity has potential to deliver over 12-15 per cent annual return whereas investments in conservative assets such as fixed income will only yield you 7-8 per cent annually. See the following table, it shows that in the past 10 years, Sensex has delivered over 10 per cent annually for an investment made for a 10-year period. In fact on five occasions the return was above 15 per cent.
You can also add up Rs 1 crore by investing in fixed income assets but at a lower rate of return you will have to invest a much higher sum to achieve the targeted amount.
The table below shows how monthly investment requirement rises with the fall in the rate of return. If the rate of return on investments is 15 per cent you will have to invest Rs 6,679 per month to accumulate Rs 1 crore in 20 years while if the rate of return is 7 per cent, you will have to invest Rs 19,196 monthly to achieve the targeted amount of investment.
If you are scared of investing in direct equities as you don’t have the skill to research about individual stocks, take the route of equity mutual funds as they are professionally managed and invest in a basket of companies, which makes them less risky.
Invest for long term
Since the goal is big and the amount invested is small, you will have to invest for long term because longer the tenure higher will be the accumulation. See the table below, it shows how your accumulation rises with the rise in the tenure of the investments given the same rate of investment and same amount of investment. If you would have invested Rs 5,000 per month for 10 years in an instrument yielding 15 per cent return you would accumulate Rs 13.76 lakh while if the sum is invested for another 10 years, the accumulation would rise to much higher level at Rs 74 lakh. This happens because of the power of compounding. If you stay invested for long-term, you earn returns over your gains which helps in accumulating more. Therefore, you can clearly see by investing Rs 5,000 per month you will be able to accumulate Rs 1 crore between 20-25 years.