How To Build ₹1,00,00,000 Using MFs

The route to becoming crorepati for retail investors demands a very systematic and disciplined approach. DSIJ team explains how you can achieve this goal with different durations, returns on investment and investment amounts.

The latest monthly data released by industry body Association of Mutual Funds in India (AMFI) for the month of December 2021 was very encouraging from equity mutual fund perspective. According to AMFI monthly data, inflows of equity mutual funds have more than doubled to ₹25,077 crore in December 2021 compared to ₹11,615 crore witnessed in the month of November 2021 and against an outflow of ₹10,147 crore in December 2020. The net inflows registered in December 2021 in equity MF were the highest since April 2018. Even investments through the SIP route in the month of December 2021 were at ₹11,305 crore, which seems to be the highest ever figure. 

Good inflows, along with healthy surge in equity markets, has led to an increase in the share of equity schemes in the overall AUM of domestic mutual funds. It has increased from 31 per cent at the start of the year to 36 per cent by the end of the year 2021. For year 2021, the total increase in AUM of equity MF has been ₹4.4 lakh crore, out of which around ₹1 lakh crore has come from inflows and the rest from mark-to-market gains. At the end of December 2021, equity-oriented schemes derived 88 per cent of their assets from individual investors (Retail + HNI).

This shows that retail investors are increasingly getting attracted towards mutual funds for their investment needs and for achieving their financial goals. Mutual funds have become an integral part of retail investors' portfolios with investors assigning different SIPs to different goals. One of the reasons for such recent surge in the interest of the investors are the better returns provided by equity mutual funds in the last few years.

In the last one year, most of the equity dedicated mutual funds have on an average generated return of more than 20 per cent. The small cap category on an average has generated return of 62.79 per cent in the last one year. If we look at performance of last three years, the annualised returns are more than 20 per cent. It has been well established that equity mutual funds, as an asset class, have the potential to generate wealth faster than other asset classes.

Many financial experts and financial planners believe that if you want to create a sizable corpus for your various needs such as retirement or children’s marriage or their higher education, you need to invest in mutual funds through SIP route or even lumpsum if you have sufficient cash flows.

Different investors have different needs; however, we would like to address the need of an investor who wants to build a corpus of Rs one crore after a specific period.

There are three factors that have to be taken into account by an investor to accumulate the desired amount. First is the amount of investment, second is the return on such investment and the third is the period for which you make this investment. Out of these three, two factors, that is, the investment amount and the period for which you invest, are in your control. You know from your finances how much you can invest and also know when you require a particular amount. But you do not have control over the returns your investment will generate and, hence, we will try to focus on the expected return. This is because the current rate of return may not be sustainable and one cannot expect to get such returns consistently over the long term. The return will revert to mean and, in the following paragraphs, we will try to establish the mean return that you can expect in the longer run.

Expected return

Equity
To arrive at expected return, we have used historical data of S&P BSE 500. We calculated rolling returns of the index to arrive at reasonable expectation of return by an investor if he is investing in a well-diversified equity mutual fund. We took rolling return generated by BSE 500 for various periods and took its median to know the expected returns.

The table shows the median of rolling returns for this index over different time periods.

The table above summarises the results of our study. For one year, a total 3250 data points were considered, out of which 2373 times S&P BSE 500 generated positive returns, while 877 times it generated negative returns. So, 27 per cent of the time the investor would have got negative returns if he had invested only for one year. However, as we increase the number of years of investment, the investment experience becomes better for the investor as the number of times an investor gets negative returns reduces significantly. For example, if an investor had remained invested for more than seven-year period, his investment would have never generated negative returns. From the table, it is clear that if you want better returns from equity investment, you need to remain invested for a longer period. Moreover, the return expectation should not be more than 12 per cent and the current higher returns may not sustain for long.

Debt

Portfolio of an investor should contain both equity as well as bond. To get a handle on how the bond returns behave in the longer run, we analysed the performance of CCIL Broad Index. This index comprises of top 20 traded bonds based on volume and number of trades. The total return index (TRI) gives the absolute return that the bond portfolio offers, and it includes coupon accrued and capital gains (or losses).

The table shows the median of rolling returns for this index over different time periods.

For debt funds, we do not see any direct correlation between the number of years and investment returns or volatility in returns. Nevertheless, looking at these numbers, we can safely assume return of around 8.5 per cent for three years and above.

Investment

Now we will look at the investment required to create Rs one crore over different time-frames. But before we proceed, you will have to know your risk profile that will help you to have an appropriate asset allocation. Such asset allocation will help you to determine your investment amount and the expected rate of return.

Following illustration shows ideal asset allocation for investors with different risk profiles

Based on the above asset allocation, the table alongside shows the expected return of different portfolios. We have assumed 12 per cent annualised return from equity mutual funds and 8.5 per cent from debt mutual funds. Therefore, if you are an aggressive investor and follow asset allocation of 70 per cent to equity and 30 per cent to debt, you will generate weighted average return of 10.95 per cent. Similarly, if you are a conservative investor, your expected return will be around 9.55 per cent.

Based on the above asset allocation, the following table shows the expected return of different portfolios. We have assumed 12 per cent annualised return from equity mutual funds and 8.5 per cent from debt mutual funds. Therefore, if you are an aggressive investor and follow asset allocation of 70 per cent to equity and 30 per cent to debt, you will generate weighted average return of 10.95 per cent. Similarly, if you are a conservative investor, your expected return will be around 9.55 per cent.

Risk profile of an investor also differs based on the stage of his lifecycle. So, if you are a young investor, you can be aggressive; whereas if you are of a retiree, you can be conservative in your investment approach.

Getting Rs One Crore

SIP Route : Based on the weighted returns we calculated above, the following table shows the amount you need to invest every month. For example, if you are an aggressive investor, your expected return is 10.95 per cent. For simplicity, we will assume it as 11 per cent. So, if you are 45 years old now and you want Rs one crore at the end of 60 years, then you have 15 years to achieve that and you need to invest Rs 22,879.53 every month to reach that goal. In these 15 years, you will be investing Rs 41 lakh. However, if you are 40 years of age and want to accumulate the same amount (Rs 1 crore) by the age of your retirement (60 years) and your investment generates returns of 12 per cent, you need to invest just Rs 10,871.25 to get the desired amount. The total investment you invest would be around Rs 26 lakh. So, the earlier you start investing, the lower you need to invest.

Lumpsum Route : SIP is definitely one of the best ways to invest in mutual funds. However, there are investors who prefer lumpsum investment and wish to invest at one go for various reasons, including good amount of cash flow. The following table shows a combination of number of years and rate of returns and the amount of investment required to accumulate Rs 1 crore. For example, if you expect 10 per cent return on your investment and want to invest for a period of 20 years, you need to do a lumpsum investment of Rs 14,86,436.

Becoming a Crorepati

The route to becoming a crorepati for retail investors demands a very systematic and disciplined approach. Mutual funds provide a simple and hassle-free way of achieving the target amount. There is a thumb rule of 15*15*15 that will help you to accumulate a corpus of Rs 1 crore. According to this thumb rule, if you invest Rs 15,000 every month for a period of 15 years and your investment generates 15 per cent return, you will be able to accumulate Rs 1 crore.

Rupees one crore may not be a very inspirational amount for many of you now, nevertheless, it can still help you achieve lot of your financial goals. But before you start investing, it is important to pick the right kind of funds. Recently, you may have seen IT dedicated funds on a tear, but these funds cannot be the core of your portfolio as their performance is very cyclical and many times these funds are too volatile. Hence, the core of your portfolio should be such funds that are all-weather and can mitigate the downside risk better. Similarly, for debt funds, you should select funds whose duration matches with the time-frame of your financial goals.