The 'Crorepati' Syndrome

For centuries, the Indian people could not even think about the very existence - the mere possibility - of an Indian Dream. But ironically, it was upto a former US President to define it.

As Bill Clinton put it in a speech - the dream of every Indian is to become a Crorepati. That is the difference between India at Independence and the new India, at the turn of the millennium. What was once not even a possibility has now been given a shape - a magic figure - Rs.1 Crore.
How does one go about achieving this figure? Surprisingly, the road to Rs.1 crore is not as difficult as it may seem. The answer lies in a planned and disciplined approach towards savings and investment. An amount as low as Rs.1,540, if invested monthly, can get you there in 25 years. The secret lies in the power of compounding where interest on re-invested interest ensures that your savings grow at a geometric rate rather than at an arithmetic rate. The other thing at work for you is the magic of systematic investments. Rs.100 invested monthly would grow to an amount larger than a one-time Rs.1,200 investment at the end of the year simply because of the interest earned on Rs.100 every month. Here, Rs.100 would grow to Rs.1,267 at year-end at an interest rate of 10%.

The lower the age when you start investing, the lower the amount that is needed for investment. For example, an individual starting at age 25, having 35 years till retirement, would need to save only Rs.6,985 per month (at an interest rate of 6%) as compared to an individual who starts saving at age 35, having only 25 years to retirement. In our example, the 35 year old would have to invest Rs.14,359 per month to reach a crore.

As your appetite for risk increases, so does the return. As a result, you would have to save less each month. For example, a 25-year old individual A, with a conservative risk profile, investing in RBI 6.50% tax-free bonds, would have to save Rs.6,216 per month for 35 years. Individual B, also 25 years old, with a higher risk appetite i.e. not averse to investing in equity funds, would earn a return of perhaps 12%. Individual B would need to save only Rs.1,540 per month for the same number of years.

The individual amounts that an individual would need to save would depend upon the tax-bracket that the person is in since except for the RBI Bonds, all the other instruments are taxable and the effect of tax has not been included in the calculations since it would vary for different individuals. But then should one invest only in a single asset such as the RBI bonds which provide tax-free income? This is not recommended since this would not only lock in your investments at a low rate of return, it would also expose the investor to interest rate risk i.e. progressively lower rates of interest on the bonds, which has been the trend in the past. Further, the investor would not be able to take advantage of returns from equity funds, should the equity markets turnaround this year.