The Click-Bait of Investing
“Invest ₹10,000 every month and you will have ₹3,00,00,000 for your retirement fund.”
How many investment products have you come across that claim to make you Crorepatis and Millionaires by investing a small amount every month? Isn’t this the standard marketing pitch of each and every mutual fund distributor out there? Before you start daydreaming about how you’ll spend all that wealth, you need to understand the reality behind these numbers. Let's take a closer look to see what they really mean!
The Story Behind These Numbers
Albert Einstein called compound interest “the greatest mathematical discovery of all time”. Compounding basically transforms your money into a potent income-generating tool. The only requirement for it to work well is time. The longer the compounding period, the more amazing will be its result. That is also the reason why almost every financial product can claim to make you super wealthy, irrespective of the returns they are able to generate.
Let’s breakdown the numbers in the above example. What would it take to turn a monthly SIP investment of ₹10,000 to over ₹3 crores? The answer is… ‘Not Much’! Let’s assume that you have 25 years till your retirement age. If you invest a fixed amount of ₹10,000 every month, that translates to a total investment of ₹30 lakhs. If you are able to generate a return of 16% on your investments, you will have a final investment corpus of roughly ₹3.25 crores. That’s a mere 3% more than the long-term average returns of the stock market benchmark indices like Sensex and Nifty 50.
What works in favour of these marketing gimmicks is not that the product itself is amazing, but the fact that even an average product can seem to produce exceptional results if you consider a sufficiently long period of time.
The Harsh Reality
In a world drowning in clickbait ads and marketing content, it is difficult to attract customers’ attention towards any product. So, a commonly used trick is to shock people into getting interested. And what better way to do so than to tell them that they can earn a staggering amount of money with the least bit of effort! But aside from the shock and awe factor, there isn’t much substance to such claims. The oversimplification of the result is clear deception considering that, even though ₹3 crores is a huge amount, it is something that you will earn after 25 years. That’s a really long time and you have to realize that ₹100 all those years in the future will not be equivalent to ₹100 today. If prices rise each year by an average of 7% (inflation), what would ₹3 crores be worth in terms of today’s value of money?
And the answer is… less than ₹60,00,000!
Yes, that’s right. All that wealth that you would have accumulated after 25 years is roughly equivalent to just under ₹60 lakhs in today’s world. Doesn’t have the same shock factor any more, right?
It is also misleading to portray that all you need to do is save a small fixed amount every month to reach a financially secure retirement. In reality, you must create a realistic investment plan that can cater to your future financial requirements. You must increase your savings in line with your income and invest in a manner that helps you achieve your long-term goals. Finally, you should re-evaluate your plan once every few years to make sure that you are on the right track.
Light at the End of the Tunnel
Does all this mean there is no point in saving and investing for a secure financial future? Definitely not. In fact, it is all the more important that you save as much as you can and invest wisely in order to turn those savings into a second source of income. The important point to remember is that you should not get swayed by anyone trying to get your attention by making false or misleading promises. It is crucial that you peel away the marketing gimmick and look at the quality of the underlying product.