Invest Rs 5k For 25 Years: See How Much You Can Make

Investing is not just about setting aside money -- it's about making it work for you.
Earning returns that exceed inflation is essential for wealth preservation and growth, explains Ramalingam Kalirajan.

What if someone diligently invests Rs 5,000 every month for 25 years? The potential returns could vary significantly depending on the investment avenue chosen.

Let's explore how different options could shape long-term wealth accumulation.

Rs 5,000 Monthly: How Different Investments Can Shape Your Future

Some individuals prefer absolute safety, keeping their savings in a bank account. Over 25 years, this disciplined saving would amount to Rs 15 lakh.

Assuming an annual interest rate of 3%, the total corpus would grow to Rs 22.36 lakh. But is this the most effective way to grow wealth?

Now, consider investing the same amount in a debt mutual fund. With an expected annual return of 8%, wouldn't the outcome be far more rewarding?

Indeed, the corpus would expand to Rs 47.87 lakh -- comparable to what a fixed deposit might offer.

What if, instead, the investments were directed towards gold savings or a Gold ETF? With an assumed annual return of 9%, the total wealth would rise to Rs 56.48 lakh. Doesn't this highlight the immense potential of well-planned investments?

Let's assume an investor contributes Rs 5,000 every month into an index mutual fund that tracks NIFTY or Sensex.

If this investment yields an average annual return of 12%, the total corpus accumulated over 25 years would be approximately Rs 94.88 lakh far exceeding the Rs 47.87 lakh that a fixed deposit might offer.

The Rule of 114: A Simple Way to Evaluate Investments

Now, consider a scenario where the same Rs 5,000 is invested each month in an actively managed equity mutual fund for the same duration of 25 years.

Assuming a higher average annual return of 15%, the accumulated corpus would grow to around Rs 1.64 crore.

A 25-year investment horizon is undeniably long-term. In such cases, taking calculated risks with equity-based funds can potentially outpace inflation and significantly enhance wealth accumulation.

But how do we determine if an investment is truly rewarding?

A general benchmark is that a good investment should ideally triple in value over a decade. But how long does it take for an investment to triple?

The Rule of 114 provides a quick estimation. Simply divide 114 by the annual return percentage to determine the number of years required for an investment to triple.

Formula:

Years required for investment to triple = 114 / Annual Return Percentage

Wouldn't it be insightful to use this rule to evaluate different investment opportunities?

If an investment yields an average annual return of 12%, it will triple in approximately (114/12) 9 years and 5 months -- essentially, around 10 years.

This means that for an investment to grow threefold in a decade, it should generate an average annual return of 12%. Now, let's take a look at the BSE Sensex.

A decade ago, the index stood at 25,000 points, and today, it has surged past 75,000 points before experiencing a slight correction. Doesn't this indicate that the Indian stock market has delivered solid returns?

However, while evaluating investment growth, one critical factor must not be overlooked -- inflation.

A high inflation rate erodes the purchasing power of money over time. So, how do we measure its impact?

There's a simple formula: Divide 70 by the inflation rate to determine the number of years it takes for money's value to halve.

With India's average inflation rate at 7%, the purchasing power of money is halved in 10 years. Let's break it down with an example: Suppose someone invests Rs 5 lakh in market-linked instruments.

In 10 years, the investment triples, reaching Rs 15 lakh. However, with 7% inflation, the real value of Rs 5 lakh drops to Rs 2.5 lakh in the same period.

So, adjusting for inflation, the Rs 15 lakh investment effectively holds a real value of Rs 7.5 lakh after 10 years.

This still represents significant wealth creation. But what if the return were only 7.2% per annum? In that case, the investment would have merely doubled to Rs 10 lakh, barely outpacing inflation.

This underscores a crucial investment lesson: earning returns that exceed inflation is essential for wealth preservation and growth. Are your investments keeping up?

In other words, since the interest income and inflation rate were equal, the investment's real value did not increase.

So, isn't it crucial to assess the impact of inflation before making any investment? How long will it take for the investment to double or triple?

These are key considerations for making profitable financial decisions. Otherwise, wouldn't one be forced to take loans just to keep up with rising costs?

Final Takeaway:

Investing is not just about setting aside money -- it's about making it work for you. As we've seen, different investment options yield vastly different results over 25 years, with inflation playing a critical role in real wealth accumulation.

The key takeaway? Always aim for investments that outpace inflation while aligning with your risk appetite. Whether you choose equity, mutual funds, or safer options like fixed deposits, the goal should be financial security and growth.

• You can ask rediffGURU Ramalingam Kalirajan your questions HERE.

Ramalingam Kalirajan, an MBA in finance, is a certified financial planner. He is the director and chief financial planner at Holistic Investment Planners, a leading financial planning and wealth management company.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.