look news india
At the beginning of their career, youth often give priority to spending their first salary on lifestyle, gadgets and outings. But there is a golden rule of the financial world that the sooner you start investing, the faster your money works for you. It is from this thinking that emerged ‘SIP Rule-40’—a financial discipline that focuses on starting a systematic investment plan at the age of 21 to 25 and building a strong wealth fund of minimum Rs 2 crore by the time you reach the age of 40. The basic basis of this rule is not based on any scheme to become rich overnight, but on the ‘Power of Compounding’ which Albert Einstein called the eighth wonder of the world. If you want to be free from the stress of EMIs and taste financial freedom at the age of 40, then this formula can become the biggest financial shield of your life.
In stock market and equity mutual funds, ‘time’ is more important than returns. At ages 21 to 25, you don’t have retirement or the burden of responsibilities, and you have a long time horizon of 15 to 19 years. When you start investing at the age of 21, your money goes through several market cycles (ups and downs) to achieve long-term stability and exponential growth. Whereas if a person follows the same goal at the age of 35, then to make Rs 2 crore by the age of 40, he will have to do SIP of lakhs of rupees every month, which becomes impossible for most of the salaried people. Therefore, even small savings at an early age prove to be more powerful than big investments in the long run.
Equity mutual funds (like Nifty 50 Index Fund, Flexi Cap Fund or Large & Midcap Fund) have historically delivered an average compound annual return (CAGR) of 12% to 14% over a period of 15 to 20 years. If we assume an annual return of 12% as a conservative estimate, there are two major ways to accumulate a corpus of Rs 2 crore from age 21 to age 40 (i.e. 19 years). The first method is a fixed amount flat SIP, where you have to invest around Rs 25,000 every month for 19 consecutive years. Your total accumulated capital in 19 years will be around Rs 57 lakh, while the expected return through compounding will be around Rs 1.45 crore, taking the total corpus to Rs 2.02 crore.
The second and most practical way is ‘Step-up SIP’, which suits the annual increase in salary of every youth. It may be difficult for a fresher to withdraw Rs 25,000 per month in the beginning. In such a situation, you can start SIP of only Rs 10,000 to 12,000 per month at the age of 21 to 22 years. After this, keep adding a top-up or step-up of 10% to your SIP amount every year. For example, Rs 12,000 per month in the first year, Rs 13,200 in the second year, Rs 14,520 in the third year. With this disciplined 10% annual growth, you can easily build a corpus of Rs 2.10 crore to Rs 2.25 crore by the age of 40 without any huge financial pressure.
To achieve the target of Rs 2 crore, it is not enough to just invest money, but it is also important to have right asset allocation. Since you are in your 20s, your risk appetite is at its maximum. A balanced portfolio with a 15 to 19 year horizon might have 40% allocated to large cap or Nifty index funds, 35% to flexi cap or multi cap funds, and 25% to mid cap or small cap funds. Mid and small cap funds provide extra alpha (excess returns) to the portfolio in the long term, while large cap funds provide stability in market downturns. The safest approach is to choose 3 to 4 well-diversified funds instead of investing all your money in one fund.
The biggest challenge in this entire journey is market volatility. When there is a correction of 10% or 20% in the stock market, novice investors get nervous and stop their SIP or withdraw money. This is where the biggest mistake occurs. During a market downturn, you get more mutual fund units (Rupee Cost Averaging) for the same SIP amount, which increases your profits like a rocket when the market recovers. Apart from this, along with starting investment, keep an emergency fund for 6 months of expenses and an adequate term and health insurance, so that in case of any emergency, you do not have to touch your SIP money.