“Hi Niraj, How are you doing today.” Said Mr. Shrikant Desai, a 45 year old businessman to his nephew Niraj, a 29 year old IT Professional.
“Hey Uncle, Good to see you, Said Niraj.“ We are meeting after a pretty long time."
“Well, honestly speaking, I have specifically come to seek your help.” Said uncle Shrikant. “I have come to know that you are investing in a plan which would fetch you more than Rs.3 crores at your retirement. And the ‘premium’ for the same is also pretty less.I just wanted to invest in the same plan.”
“That’s nice” smiled Niraj. “Well, a few things first. It is not an ‘insurance policy, so there is no premium in it. It is called an SIP wherein I have to invest Rs.10,000 p.m. and I will get a retirement amount of around Rs.3 Crores after 30 years assuming returns of 12% p.a."
“Oh Wow! So I also want to invest in this plan. I can easily afford an investment of Rs.10,000 p.m.” said the happy uncle.
“But you don’t want to retire at the age of 75, do you ?” Asked Niraj.
“Of Course not! If you are planning to retire at 59, why should I retire at 75? I will also retire at the age of 60” asked Uncle Shrikant.
“Well, in that case, you only have 15 years to invest uncle.So you won’t be able to get Rs.3 Crores with an SIP of Rs. 10,000 p.m.”said Niraj.
“But you just said, that in this plan, if one invests Rs.10,000 p.m., he gets Rs.3 Crores at retirement.” Uncle Shrikant was surprised.
“I never said that.I said, I will get Rs.3 Crores at retirement with this investment.That’s because I have 30 years to invest,whereas you have only 15” Explained Niraj.
“Ohh! That’s not a big issue. I will double the investment to make up for the time. I can even afford to invest Rs. 20,000 p.m. Then toh I can get Rs. 3 Crores at retirement na. ”said uncle Shrikant proudly.
“I am sorry to say this,but you won’t uncle” said Niraj.“ The time factor cannot be made up just by doubling your investment. Even if you do an SIP of Rs.20,000 p.m. you will get a retirement amount of around Rs. 95 Lakhs.”
“Then how much would I need to invest to get Rs.3 Crores on retirement?” Asked Uncle Shrikant.
“In my opinion, you would need to invest Rs.65000 p.m. to accumulate a retirement wealth of Rs.3 Crores." Said Niraj after doing some calculations.
“That’s not fair! If I am investing for half the number of years than what you are, I am compensating by doubling the investment amount. Both of us should get the same results. It is simple mathematics. Why my investment amount is more than 6 times for just half the time?” uncle Shrikant was disappointed.
“That’s the magic of compounding uncle. Once you let the time slip from your hands,you might have a pay a much bigger price to make it up.If you had started investing 15 years back, even you could have accumulated Rs.3 Crores with a Rs. 10,000 SIP.” Smiled Niraj.
“You are so right Niraj. I really regret not realising this when I was your age. But I will make it a point to tell my son to start investing at an early age so that he does not have to invest a heavy amount when he reaches my age.” Said Uncle Shrikant.
“How old is your son,uncle?” Asked Niraj.
“He is 25 Years old and started working 6 months back.” Said uncle Shrikant Proudly.
“Well, in that case, he can achieve a retirement wealth of Rs.3 Crores with a small SIP of just Rs. 6000 p.m.” Said Niraj after doing calculations.
Uncle Shrikant stood from his chair to hear this.“ Just Rs. 6000 p.m.? That’s like less than 1/10th of what I need to invest. Now I am truly astonished. So that means, just because I didn’t plan and invest at the age of 25, I now have to multiply that amount more than 10 times.”
“That’s the magic of compounding uncle.And that is why,someone has rightly said ‘A Stitch in Time, Saves Nine.’ If one does not want to shell out a nine-fold or ten-fold amount later, all he has to do is start planning and investing at an early age.” Said Niraj.
We look forward to your feedback and comments on the above article.
(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical)
The Author Prof. Saurabh Bajaj (BE, MBA, FRM) is Chief Investment Planner with Nidhi Investments, Mumbai. He may be contacted on saurabh@nidhiinvestments.com if you have any questions.
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