• How to become a Crorepati
  • How to become a Crorepati
    BY DHIRENDRA KUMAR, EDITOR, VALUERESEARCHONLINE.COM
    Yes, it's possible. In fact, becoming a crorepati by investing in mutual funds is very much possible. And it's easy as well. All you need to do is invest small amounts regularly in well-managed funds. Of course, that's just the basic idea. There are a few more essentials that need to be taken care of, but that's why you are reading this article.

    First things first - do you have the stomach for investing?
    Anyone can invest regularly when the going is good, but can you stay the course and continue to invest when the going gets bad? The way stock markets behave (like right now), it isn't easy to figure out what's likely to happen in the short or medium term. Is it possible to have an investment strategy that will make money in the long-term regardless of what happens in the short-term? If the past is anything to go by, then there certainly is.

    Slow and steady can get you to your crore

    The fact is that all the nerve-rattling action of the rise and fall of the Sensex has nothing to do with the small investor and should not bother you. If this sounds bizarre, here's proof from time. We studied the SIP (systematic investment plan) returns of diversified equity funds over the last 10 years. How much could you earn by this simple way of investing and going at it for a long time? You'll be surprised.

    If you had invested Rs 20,000 a month for the last ten years in any one of the better mutual funds, your Rs 24 lakhs could have grown to almost a crore of rupees. In fact, the best few could have left you with a stash that would be substantially more than a crore! And mind you, the last ten years were not exactly a trouble-free period. There would have been times when your portfolio would have come under a serious threat of going into the red. And what could you do then? You could either exit the market to save your capital. Or be patient and go on to become a crorepati! The key we are pointing out to is 'long-term' investing. Instead of figuring out where the stock market will be next week or next month or next year, just focus on the simple strategy of investing a steady amount regularly and keep doing it month after month, year after year.

    Put the power of time behind your savings
    The all-important role of time can also be demonstrated with another example. Consider two investors A and B who set out on their journey to accumulate wealth. Investor A realised the potential of equities quite early and started investing Rs 20,000 a month, 10 years ago. Investor B, on the other hand, procrastinated for five years before finally buying into the equity story. He started investing double the amount each month to catch up with his friend. Despite investing an equal amount of Rs 24 lakhs, Investor A would be almost twice as wealthy as Investor B as his money would have more time to compound.

    The lesson is simple - there is no substitute for time so the sooner you start investing, the faster you will join the elite club of crorepatis. A story about building wealth over the long term could have concluded here, but stepping back in time reveals some more compelling facts.

    Here's more proof of the pudding

    We decided to move away from the glory of the last few bull years to check results over different time periods. Since mutual funds have not been around that long, we used the Sensex to check out SIP returns for every block of ten years since 1980.

    What we found is that while an investor would have earned far higher returns than other asset classes in most of the decades, equities did show their fearful face in two of these 10-year periods - those ending in 2001 and 2002. In fact, the performance had been uninspiring in the decade ending 2000 as well, when the markets failed to earn a return equal to the risk-free rate. The caveat 'mutual fund investments are subject to market risks' does deserve some attention after all. But there are a lot more things to consider before jumping to a conclusion.

    First, the superb returns generated even by passive investing for so many years. It was only in two out of 18 periods under consideration that the markets threw up a bad surprise. Further, the fact that these two decades ended during the worst meltdown till then, will have to be discounted as extending your investment horizon by a couple of years could have turned things around quite dramatically. And lastly, this analysis was based on passive investing. In actuality, actively managed funds have beaten the market by a huge margin.
    All this leaves us pretty convinced that over the long term even small investors can become wealthy. So while you keep trying your luck at some of the popular game shows, keep investing small amounts in mutual funds as well. The probability of becoming a crorepati through the latter is much higher.
     
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