In our previous article, we emphasized the importance of the value of time to build one’s portfolio. However, the rate of return generated also plays an equally vital role when it comes to planning for one’s financial stability over the long term.
Let’s understand the impact of compounding on your wealth generation due to different asset class:
|Investor Name||(Rs. ‘000) Per Year||Start age||End age||Investment Term||(Rs. ‘000) Total Investment||Portfolio Value**||Asset Class*||Growth**|
|Ms. Geeta||50||18||28||40||500||52.60 lakhs||Fixed Deposit||11x|
|Ms. Rita||50||18||28||40||500||2.60 crores||Equities||53x|
*Growth rate assumed to be at 7% and 12% per annum. **Approximately rounded off.
From the above example, both Rita and Geeta have invested Rs. 50 thousand yearly from the age of 18-28 and thereon let the corpus grow till the age of retirement (58). However, Rita chose to invest in equities whereas Geeta, who is a conservative investor, chose the safe option and invested in a Bank Fixed deposit. Observing the corpus on retirement, Rita’s corpus had grown at a mammoth rate of 53 times and Geeta’s had comparatively grown at a mere rate of 11 times.
This portrays the meaningful impact of investing in asset classes that can generate higher return over a long period of time as compared to the conventional instruments that cannot generate a substantial corpus by the retirement age.
Time in the market and the investment vehicle chosen play a vital role in one’s financial planning. Simple investing will not help one in creating a sufficient corpus over the long-term. It is important to not only work for the money but also make the money earned in past work for you.
To make your money work for you, investments need to be started at an early age, be consistent, and appropriately customized as per an individual’s risk profile and goals in order to Retire Rich.