Who doesn't want to be a millionaire? Surely most of us would wish to. But how many of us actually work towards becoming one? Perhaps we can't just sit and wish to win a lottery someday to become a millionaire, right??
That’s where wealth creation through investment comes into the picture.?Disciplined investments can gradually make you a millionaire. After all, slow and steady wins the race!?
Let's take up three of the common investment options taken up by investors- PPF, bank FDs and mutual funds. Comparing these will give you a fair idea of how much time it will take to become a millionaire.
A?public provident fund (PPF) is?one of the safest among all tax-saving investment options. Managed by the Government of India, both?the principal and the interest components come with a sovereign-backed guarantee.
Contrary to popular belief, the interest rates of PPF do not remain fixed throughout the entire tenure. The Finance Ministry reviews the interest rates of PPF along with other small saving schemes?every financial quarter. The interest rates are set primarily on the basis of government bond yields. Currently, the government has kept the PPF interest rate at 7.1% p.a. for the July-Sept 2022 quarter.?
Bank FDs are one of the most common and traditional investment instruments in our country. Fixed deposits opened with scheduled banks (as per the RBI list) are insured up to Rs 5 lakh under DICGC. Simply put, the DICGC (Deposit Insurance and Credit Guarantee Corporation), which is a subsidiary of RBI, offers insurance cover for cumulative bank deposits, which include FDs, savings accounts, recurring deposits and current accounts. They are insured up to Rs 5 lakh per bank per depositor in the event of bank failures.
Also, unlike PPF, there is no mandatory lock-in period in bank FDs?unless you opt for tax saver FDs. And even for these tax-saving FDs, the lock-in period is just five years, which is much lower than the 15-year lock-in of PPF. As far as returns are concerned, currently, the interest rates of various banks are broadly varying between 3%-7% p.a., across different public and private sector banksand tenures, including small finance banks.
For comparing the returns of mutual funds, let's first categorize them broadly into debt, equity and hybrid funds, given that they cater to different risk appetites.
Debt funds are a type of mutual funds that invest in fixed income securities such as corporate bonds, treasury bills, commercial papers, government securities, and numerous other money market instruments. Each of these instruments involves a pre-decided maturity date as well as an interest rate which the investor can earn on maturity. Since the returns of these securities are generally not affected much by market fluctuations, they are much less volatile than equities, thereby making debt securities a suitable investment option for relatively risk-averse investors.?
As far as returns are concerned, debt funds’ current category average returns (for direct plans, as on 20 July 2022) are:?
Long duration funds:?1.16% (1 year), 3.61% (3 year), 5.87% (5 year), 7.87% (7 year)
Medium duration funds: 3.92% (1 year), 5.85% (3 year), 6.00% (5 year), 7.14% (7 year)
Liquid funds:?3.72% (1 year), 4.09% (3 year), 5.33% (5 year), 5.93% (7 year)? ??
As the name suggests, hybrid mutual funds invest in two or more asset classes, which are usually a combination of equity and debt mostly. They aim to offer a balanced component to your portfolio, with different proportions of equity and debt investment allocation for different schemes to suit varying risk appetites. They are usually ideal for investors who aim to get a mix of safety, income and modest capital appreciation. In terms of risk, hybrid funds can be considered riskier than debt funds but safer than equity mutual funds.
As far as hybrid funds’ returns are concerned, hybrid? funds’ current category average returns (for direct plans, as on 20 July 2022) are:?
Aggressive hybrid: 4.73%(1 year), 13.94% (3 year)
Balanced hybrid: 4.74%(1 year), 9.58% (3 year), 6.93% (5 year), 7.97% (7 year)
Conservative hybrid: 4.90%(1 year), 7.87% (3 year), 6.68% (5 year), 7.78% (7 year)
Equity mutual funds pool the money of investors and predominantly invest the amount into the shares of different companies. Usually, equity mutual fund managers aim to offer high returns by diversifying and spreading the investments across various companies from different sectors or with varying market capitalizations, such as large cap, flexi cap, mid cap or small cap.?
Equity mutual funds are typically known to have historically been generating much higher returns than other investment vehicles like fixed deposits or debt-based funds, more so in the long run. Remember that equity funds’ performance depends on market dynamics, so the element of risk tends to be higher. However, the degree of volatility tends to be higher in the short term but lower over the long term.
As far as returns are concerned, equity funds’ current category average returns (for direct plans, as on 20 July 2022) are:?
Large cap: 5.61% (1 year), 14.30% (3 year), 10.95% (5 year), 10.52% (7 year)
Mid cap: 6.21%?(1 year), 23.24% (3 year), 12.73% (5 year), 13.20% (7 year)
Small cap:?3.99%? (1 year), 28.85% (3 year)
Flexi cap:??4.93%? (1 year), 15.92% (3 year)
Remember that mutual fund returns keep varying depending upon the market scenario.
Also Read:?Find Out If You Should Include Debt Funds In Your Equity Heavy Mutual Fund Portfolio
Now, using a goal-planning calculator, let's check how much time and money it takes to accumulate a million rupees (Rs 10 lakh):
PPF (7.1% p.a. return)
If you invest approximately Rs 5,711 every month, you will be able to reach the Rs 10 lakh target in 10 years.
If you invest approximately?Rs 3,109?every month, you will be able to reach the Rs 10 lakh target in 15 years.
If you invest approximately?Rs?13,849 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?80,181?every month, you will be able to reach the Rs 10 lakh target in just 1 year.
Bank FD (Assuming FD rate of 5%)
If you invest approximately?Rs 6,413?every month, you will be able to reach the Rs 10 lakh target in 10 years.
If you invest approximately?Rs?14,643 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?25,697 every month, you will be able to reach the Rs 10 lakh target in 3 years.?
If you invest approximately?Rs?9,925 every month, you will be able to reach the Rs 10 lakh target in 7 years.?
If you invest approximately?Rs?81,102 every month, you will be able to reach the Rs 10 lakh target in just 1 year.
Equity Mutual Funds (Assuming a category average return of 10%)
If you invest approximately?Rs 2,392?every month, you will be able to reach the Rs 10 lakh target in 15 years.
If you invest approximately?Rs?4841 every month, you will be able to reach the Rs 10 lakh target in 10 years.
If you invest approximately?Rs?12,806 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?23,736 every month, you will be able to reach the Rs 10 lakh target in 3 years.?
If you invest approximately?Rs?8,199 every month, you will be able to reach the Rs 10 lakh target in 7 years.?
If you invest approximately?Rs?78,924 every month, you will be able to reach the Rs 10 lakh target in just 1 year.
Debt Mutual Funds (Assuming a category average return of 4%)
If you invest approximately?Rs?6,768 every month, you will be able to reach the Rs 10 lakh target in 10 years.
If you invest approximately?Rs?15,033 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?15,033 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?4,050 every month, you will be able to reach the Rs 10 lakh target in 15 years.?
If you invest approximately?Rs?10,031 every month, you will be able to reach the Rs 10 lakh target in 7 years.?
If you invest approximately?Rs?81,544 every month, you will be able to reach the Rs 10 lakh target in just 1 year.
Hybrid Mutual Funds (Assuming a category average return of 6%)
If you invest approximately?Rs?6,071?every month, you will be able to reach the Rs 10 lakh target in 10 years.
If you invest approximately?Rs?14,261 every month, you will be able to reach the Rs 10 lakh target in 5 years.
If you invest approximately?Rs?25,295 every month, you will be able to reach the Rs 10 lakh target in 3 years.?
If you invest approximately?Rs 9,560 every month, you will be able to reach the Rs 10 lakh target in 7 years.??
If you invest approximately?Rs?3,421 every month, you will be able to reach the Rs 10 lakh target in 15 years.?
If you invest approximately?Rs?80,663 every month, you will be able to reach the Rs 10 lakh target in just 1 year.
If you wish to become a millionaire, your investment amount would depend on the chosen investment avenue's returns and the tenure selected.?
A longer tenure and higher returns would imply a smaller investment amount required on monthly basis, and vice versa. Also, the higher the amount you invest, the sooner you become a millionaire! It's advisable to choose your investment avenue, amount and tenure carefully after assessing the risk and returns associated.
Also Read:?Frequently (Not) Asked Questions - How Much Tax Am I Paying On My Mutual Fund Investment?
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