Wednesday, June 10, 2009

Smart Investing.....Ignore Ulips & Dual Schemes (Insurance + Investment)

Time is money, goes the saying, which holds true in almost all aspects of life. But, it is more so in case of savings. If you start saving early, by the time you retire, you will have enough money to lead a prosperous retired life.

In fact, when you start saving early, your saved amount get a longer time to earn returns. This makes a lot of difference.

Take for example, if you start savings at the age of 25-year, or just at the time when you get your first salary, your savings of Rs 5000 per month at a conservative return of 10% per annum will swell to Rs 1.91 crore in 35 years or by the time you retire at the age of 60 year

But, if you start savings late, say, at the age of 30-year, your saving of Rs 5000 per month will become only Rs 1.14 crore.

If you start at the age of 35 year, the same savings will become only Rs 67 lakh. Not only this, at the age of 35 years, even if you start savings double the amount i.e. Rs 10,000 per month, by the time of retirement, the amount will become only Rs 1.34 crore.

This is called power of compounding. At the rate of 10%, a savings of Rs 5,000 per month becomes Rs 3,90,412 after 5 years.

That means, by then your saved amount will earn around Rs 39,000 per annum, which is around 65% of the amount that you are savings.

In 10 years, your savings swell to Rs 10,32,760, whose earnings itself will be more than 1.7 times of your monthly savings. That means, by the age of 35 year, your savings will earn more than your monthly savings.

After 25 years, your savings becomes Rs 67 lakh and contribute Rs 6.70 lakh in your net net saved amount every year thereafter, which is more than 11 times of your savings. So, if you will give more time to grow your money, more you will be benefited.

The other factor, which will decide your maturity amount, is the rate of return your money will earn. However, if you start savings early, that means, you are planning to do it for long term, you can think of investing in equities through unit linked savings schemes of insurance companies, or through mutual funds.

the long term, Indian economy is likely to grow at 7% to 8% per annum. In nominal term at an inflation rate of 5%, this will translate to a growth rate of 12% to 13%.

If it is so, the good companies should also manage to grow at around the same rate or two to three percentage points more than that in a longer horizon of 10 years to 15 years.

However, there could be some churn in between, which fund manager should be able to track and can give you a return of around 12% in the long term. The another positive aspect of investing in equity is that it is tax-free, which also help increase your return.

However, if you invest in debt funds, your return will be in the range of 9%, which will be reduced to around 6.7% post tax.

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