The oldest man on earth, Yisrael Kristal, died recently at the age of 113 in Israel. The first thing that came to my mind when I read this news was how would I manage my finances if I lived till 100 years or more. It would be a challenge. World Bank data indicates that life expectancy has increased from 52 years in 1960 to 72 years in 2015. However, despite these statistics on improving life expectancy, there is not enough effort around creating adequate wealth and cash flows to allow us to enjoy this longer life span.
To solve the wealth challenge, it is important for us to change the way we save. Firstly, financial savings in India are mostly invested in traditional, assured returns products. The drawback here is that, these investments may not help create wealth in the required proportion on account of falling interest rates. Secondly, savings in India are not bucketed according to goals but follow a single funnel approach where goals are met by drawing down from a single pool of investments as and when needed. Hence, retirement, being the last goal, is often left with the residual investment corpus as we draw down from the central pool for earlier goals.
It is therefore imperative for savers to move from a central pool to a goal-based investment portfolio as well as have a judicious mix of market-linked products like mutual funds in their portfolio. One can start a mutual fund investment with as little as Rs 500 per month through a 'recurring deposit' like approach called a systematic investment plan or SIP
Let me illustrate this with the example of equity mutual fund investments as most Indians are missing out on this potentially remunerative asset class. While one can start an SIP with as little as Rs 500 per month, but for a moment, let's start with an SIP of Rs 10,000 per month in equity mutual funds. Assuming a compounding return of 12% per annum, this monthly investment would result in a corpus of Rs 1 crore after 20 years and Rs3.5 crore after 30 years, that too tax-free as per current tax laws in India.
While these are standard SIPs, an even more interesting feature available in market is called the step-up or top-up SIP. Using this feature, instead of investing the same amount monthly across these periods, you can increase your SIP amount by a certain percentage or amount every year in line with the increase in your earnings. Let us assume you increase your above SIP amount of Rs10,000 per month by 10% every year. The revised corpus using step-up SIP at the same assumed compounding return of 12% per annum would be Rs1.58 crore after 20 years and Rs6 crore after 30 years. The step-up SIP corpus after 30 years (Rs6 crore) is almost double that of the SIP without step-up (Rs3.5 crore). Thus, by investing a little more every year, your corpus can grow significantly. Again remember, all of this is tax-free.
You may wonder how a small increase of 10% per year, can double your outcome. This is mainly due to the power of compounding, rightly called the 'eighth wonder of the world' by Albert Einstein. There are two things that help compounding work better—a higher rate of return and a longer period of investment. That's why power of compounding works exponentially when you invest for periods like 20, 30 or more years.
In order to help investors explore the potential of this exponential growth, the mutual fund industry has introduced the concept of a 'perpetual' SIP, which helps one to be disciplined savers for very long periods. Most wealth creation opportunities are missed because we do not allow our investments to compound for adequately long periods for reasons as trivial as failing to renew SIPs on their due date. In this sense, perpetual SIPs help inculcate discipline and long-term saving.
But what if you start a perpetual SIP but then need to change the amount, or temporarily stop your SIP instalment, or you simply decide to change your investment allocation? Many mutual funds today offer flexible options to help keep you investing for the long term. If you are not able to meet your SIP commitments for a month or two owing to personal exigencies, some funds will allow you to pause your SIP. You can restart your SIP instalments once your cash flows normalise. There is flexibility to also increase or decrease your SIP amounts for a brief period, say, when you receive additional cash flows like a bonus or ex-gratia or when you are able to contribute lesser in a month. If you change jobs and the date you receive your salary changes from, say, 1st to 25th of the month, there is no need to open a new SIP account but simply opt for change in your SIP date and continue it. Make sure you ask your adviser or fund about these features before starting a perpetual SIP. The sole aim of these options is to enable you to save for decades instead of years without needing to discontinue your SIP due to changes in personal circumstances, thus allowing you to enjoy compounding benefits. Perpetual SIPs with these features offer you the freedom to pay the way you want to, while sticking to your wealth path.
Starting early and investing for the long term are the essence of wealth creation. For example, Rs10,000 per month gave Rs3.53 crore in 30 years at 12% per annum in the above example. If the same amount were to be targeted in 10 years, the monthly contribution would rise 15 times to Rs1.5 lakh per month (assuming the same return on investment).
Padma Shri Jadav Payeng from Assam started planting trees in the barren sand bars of Assam in 1979, and did this relentlessly for nearly 30 years. The result—a beautiful forest that houses over 100 elephants, besides tigers, rhinos and deer. Thanks to him, over 1,300 acres of sandbars have been transformed into the Molai Forest located in Jorhat, Assam. Consistency can create results like the Molai Forest. A perpetual SIP can do similar wonders for your wealth.
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