BSE Forum: Small savings lead to wealth creation

My fourth article in Broker’s Forum Magazine.

00 Cover Page     Pages 03-32

SMALL SAVINGS LEAD TO WEALTH CREATION

Indian Economy is blessed with the people who are born with the habit to save money and thus create good capital over period of time. Indian Economy saving rate is 27 % of GDP while the world average is about 21 %. This means that Average Indian is able to save more than what the world citizen saves and now this savings is getting channelized into the Indian stock markets.

Indian stock markets are going higher and higher and this time it is not due to the fact that FII (Foreign Institutional Investors) have been investing but it is the Indian Mutual funds who have poured in more money than the foreigners. Indian Mutual Funds in the last one year from May 2016 to May 2017 have invested Rs. 71000 crore as compared to FII who have put in Rs. 58000 crore in the Indian stock markets. Also the way in which the mutual funds have touched the heart of  common investor is also commendable. The main reason for this is the SIP (Systematic Investment Plan) where you can invest as low as Rs. 1000 per month and thus create huge wealth in the long run.

For Example:-  The following example shows how wealth is created over long duration.

Monthly investment in SIP:-                Rs. 3000

Number of years:-                                         30

Average return :-                                        12 %

Total Amount Invested:-                     Rs. 10,80,000

Total Amount Received:-                     Rs. 1,05,89,741

Note:-  The above is illustrative calculation. One should contact one’s own financial advisor before making investment. Mutual funds are subject to market risk.

The above table shows that wealth is created through small savings of even Rs. 1000 per month. Currently Rs. 5000 crore are getting invested into the stock market through the SIP route. This money is of the retail investors and not of any institution.

Power of compounding:-  It is said that power of compounding is the 8th wonder of the world. Small amounts tends to become very big once the power of compounding gets going and this what is currently happening in the Indian stock market. The average ticket size of SIP is around Rs. 2500 and average value of a mutual fund investor portfolio is Rs. 78000. The retail investor has began to understand the  power of small savings which is the key to long term wealth creation.

Inflation is the main evil:-  Inflation is the main culprit which eats away your savings and thus reduces the purchasing power. The average inflation has been in the range of 5 % and thus today the fixed income instruments like the FD in banks are giving negative returns. There is no real wealth creation in the traditional financial instruments and thus it is become necessity to invest in the mutual funds.

Conclusion:-  There is a myth that in order to become wealthy more money needs to be invested in the market but the reality is that even with small amounts investments can be done on monthly basis and one can create wealth over a period of time.

Neysa Sanghavi

Student IBDP 12, Singapore International School

 

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