Practical ways to become a crorepati

Let's say, after 20 years, someone gives you Rs 1 crore absolutely free. Would that make you happy? Would it help you achieve some of your goals/ dreams? Will it make a difference in your life?

I'm sure the answer to each of these questions would be a resounding YES! Well, you don't have to depend on 'someone' to give you Rs 1 crore for free! You can do it yourself and that too in this lifetime.

The primary aim of this article is to show you how an ordinary person can become a crorepati in her/ his lifetime, provided s/he has a good financial plan and, more importantly, the willingness to implement that plan systematically.

While there are many ways in which you can achieve this goal, I will concentrate only on how to become a crorepati by saving and investing with a long-term perspective.

You might have heard about your company's short-term (1-2 years) as well as long-term (3-5 years) plans. If your company has a short-term plan and a long term-plan, don't you think it's time you have one too?

I will be taking you through three different plans or paths. At the end of the day, you can choose any of the plans mentioned below according to your need or risk appetite or you can probably customise these plans according to your necessity.

Before suggesting the path, I would like to categorise investors into three groups.

~ Low risk: Investors who do not want to invest in equities.
~ Average risk: Investors who would like to invest 10-30 per cent of their income in equities.
~ Aggressive: Investors who would like to invest more than 10-30 per cent of their income in equities.

The paths I have suggested for each type of investor would still be less risky than any direct investment in the stock market or investing a lumpsum in mutual funds.

Low risk investor

For low risk investors, my advice is to invest a few thousand rupees per month in PPF (Public Provident Fund).

• 6 things you must know about PPF 

In Plan 1 mentioned below, I have taken an investment of Rs 3,000 per month or Rs 36,000 per year. According to Plan 1 you can be a crorepati in the next 40 years. You can decrease the number of years by investing more per month or by increasing your investments gradually.

Assumptions

~ PPF will give a consistent return of 8 per cent per annum.

~ Withdrawal will not attract capital gain tax, that is, the tax structure would maintain its status quo.

Advantage

~ Extremely low risk, since the government manages PPF.

Disadvantages

~ Longer tenure.

~ Yielding 8 per cent interest consistently seems to be very unlikely. Low risk investors need to adjust their investment based on the interest rates.

Average risk/ Aggressive investor

My advice investors who fall in these two categories is that they should opt for mutual funds, and specifically opt for the 'Systematic Investment Plan'.

Why SIP?

The numbers speak for themselves. The figures given below explain why a SIP investment is better in the long term.

The returns give below are calculated from Jan 1, 2007, onwards.

Equity Diversified Mutual Funds

1. SBI Global
~ Annualised SIP return over a period of 10 years: 35.84 per cent
~  Non-SIP return (annualised) over the same period: 26.21 per cent

2. Reliance Growth
~ Annualised SIP return over a period of 10 years: 42.00 per cent
~ Non-SIP return (annualised) over the same period: 37.38 per cent

Equity Tax Saving Mutual Funds

1. HDFC Tax Saver
~ Annualised SIP return over a period of 10 years: 49.21 per cent
~ Non-SIP return (annualised) over the same period: 48.64 per cent

2. SBI TaxGain
~ Annualised SIP return over a period of 10 years: 38.59 per cent
~ Non-SIP return (annualised) over the same period: 32.16 per cent

• What's a mutual fund SIP?

3. ICICI TaxPlan
~ Annualised SIP return over a period of seven years: 44.55 per cent
~ Non-SIP return (annualised) over the same period: 24.25 per cent

If you are still not convinced about SIP, check one more statistic given below. The return given below is the 7-year annualised return (April 1, 2000, to April 1, 2007). This was a fund that was hit hard by the technology burst of 1999-2000. 

ICICI Technology Growth
~ Annualised SIP Return over a period of seven years: 32.53 per cent
~ Non-SIP return (annualised) over period: 6.82 per cent

BSE Sensex, on a comparative basis, yielded an annualised return of 18 per cent in the last 20 years. So I assume mutual funds would yield an annualised return of 25 per cent and investing in mutual funds through SIP would yield an annualised return of 30 per cent in the long term.

I know this is a bit optimistic, but if you invest systematically in a fundamentally good mutual fund, your chances to get this sort of return is really on the higher side.

Part II: Easy ways to become a crorepati

Author's disclaimer

The information contained here was gathered from sources deemed reliable; however, no claim is made as to its accuracy or content. The facts and figures given in the article might not be exact or might have errors. It's up to the user to verify these figures for themselves. The author would not be responsible for any error in the article or any misinterpretation of the facts.

Rediff disclaimer

This article is for illustrative purposes only. Readers should take the help of a professional financial advisor before investing their money.