Can Investing In Mutual Funds Make You A BILLIONAIRE?
When we read about the lifestyles of the billionaires across the world, doesn’t it ignite a dream to become a part of that exclusive group of people? It does, surely! It also makes us wonder about the strategy or approach that one needs to adopt to become wealthy. Is investing in mutual funds one of those options? Read on to find out
The word ‘crorepati’ in India carries with it the connotation of exclusivity. It’s like a club which only selected members can join. But, in recent times, with the number of crorepatis on the rise, the ones who really have wealth now aspire to be known as ‘arabapati’ since the tag automatically qualifies you as one who can live the most lavish lifestyle. Ideally, there are very few people who have created a fortune for themselves and become billionaires, namely, whose value is Rs100 crore and more. The rest of them are billionaires because they have inherited a fortune.
Becoming a planned billionaire is quite a difficult task. However, it is quite possible thanks to mutual funds that can help you increating such wealth if you can invest the required amount. For any salaried individual or middle-class person, having a bank balance ofRs1 crore is surely very alluring. But there are some who nurse bigger dreams and would like their assets to run into Rs100 crore, i.e. Rs1 billion. There can be various reasons to achieve this elusive number. Some wish to lead a lavish lifestyle, some might wish to spend their retirement with all the comfort that money can buy and some might wish to upgrade their standard of living.
However, to lead a comfortable life and be assured of a financially secure future, mutual fund investors need to exercise financial discipline and have a well-developed financial strategy in place. And remember, all your efforts would amount to nothing if you do not factor in the inflation rate while planning your financial future. Inflation is a slow poison with capabilities of reducing your purchasing power over a period of time. Now the question is how to achieve this figure? There are various ways to do so but following are the two most significant ways of going about this task.
Earn
This is one of the most adopted ways of becoming a billionaire. Start a venture, grow it over a period of time and sell stakes at premium. While doing so, you need to be extra diligent, patient and have deep knowledge pertaining to your line of business. If you wish to become a billionaire through this approach, get ready to give yourself completely to your business. Here, to make money work for you in the future, you first need to work for it. When it comes to risk, there might be instances where you won’t be able to generate revenues and make profits. For instance, look at the present scenario: the extended lockdown has made most businesses struggling to stay afloat. Only those who have been wise enough to diversify have had the good fortune to not sink in such choppy waters.
Invest
There is another way through which you can become a billionaire and that is through investments. Even this path is not that easy. You not only have to part with your hard-earned money but it also requires you to be rational and disciplined with your investments. While choosing this path you need to be absolutely abreast with the investments you have chosen. However, the best part is that you can always hire an expert to take care of your investments. Also, here you don’t need to work for money. In fact, money works for you. That said, you need to be very diligent while investing. It’s not just returns that you should chase. On the contrary, you should chase riskadjusted returns. This means that you should invest in such a way that it matches your risk tolerance level. Investment in itself is a large and diversified field. For the sake of simplicity and options that are available to retail investors, we will study only a few of the most common or popular modes.
Fixed Deposits
People are mostly comfortable with bank FDs. There are two main reasons for that, the primary one being that you get a guaranteed interest rate till the time the FD matures. And secondly, your capital remains safe. Hence, the general query that people tend to have is whether they can become billionaires by investing in bank FDs? Technically, one can become a billionaire by investing in bank FDs. Let us understand it with the help of an example. Currently, on an average the interest rate on bank FDs with 10-year maturity is 7 per cent. To keep it simple, taxation is ignored. Let us say you invest for 20 years in bank FDs, assuming 7 per cent rate of interest.
To become a billionaire at the end of the 20th year, you need to deposit Rs25.84 crore upfront. If you invest in a staggered manner, you would be subject to re-investment risk. This would be more evident in a falling interest rate scenario. For now, even if we ignore this risk and you invest in a staggered manner assuming 7 per cent rate to remain constant, you need to invest Rs19.20 lakhs per month for 20 years. In a real sense, the required amount would be more if we account for taxes. Therefore, even if you can be a billionaire by investing in bank FDs, you need to be a millionaire to begin with. The required amount of investment is quite high, which makes it an inefficient way to become a billionaire.
Mutual Funds
Indeed, mutual funds are one of the most efficient and effective ways of investing. Let us see though whether it can pave the path for you to become a billionaire. The advantage of investing in a mutual fund is that you can find various kinds of mutual funds that can cater to different needs, including wealth creation. Not just that, but you can also create a portfolio of mutual funds that would help you fulfil your financial goals. To understand whether mutual funds are truly helpful in creating wealth, we carried out a study. Here we have assumed S & P BSE Sensex as a representative of equity mutual funds. This study has been carried out for a 20-year period of 1999 to 2019.
For this study we have taken three different ways of investment, namely, lump sum, systematic investment plan (SIP) and step-up SIP. Step-up SIP is nothing but a gradual increase in your SIP amount as and when your cash flow increases. We have assumed thatRs50 lakhs is invested as a lump sum option with a SIP of Rs30,000 per month along with the option of step-up SIP. In case of the step-up SIP option, we have assumed that the SIP amount would increase by 7 per cent every year. The rationale behind choosing 7 per cent is that usually the income of a salaried individual on an average increase by that rate.
The above graph shows the movement of lump sum, SIP and step-up SIP investment. As can be observed, lump sum proves to be a better investment option than SIP as well as step-up SIP even though it would not be fair to compare lump sum and SIP. In fact, it would be more prudent to compare normal SIP with step-up SIP. In our example, step-up SIP proves to be better than normal SIP for obvious reasons since you are gradually increasing your investment. However, neither the lump sum investment of Rs50 lakhs nor the SIP ofRs30,000 per month or step-up SIP can help you achieve the billionaire status at the end of 20 years since the accumulated amounts would be Rs6.22 crore, Rs3.52 crore and Rs5.49 crore, respectively.
So, does it mean that mutual funds will not help you to turn your dream into a reality? No, there is a way. Let us see how you can achieve this goal. As we can see from the above graph, you can very well achieve Rs100 crore in 20 years by investing in any method that you feel comfortable with. However, the only catch is that the investment amount is different. This means that to become a billionaire you need to invest Rs8.04 crore in lump sum or Rs8.51 lakhs per month in SIP and Rs5.47 lakhs for step-up SIP which gradually increases by 7 per cent per annum. The amount that needs to be invested is indeed on the higher side. The result is derived from investment in Sensex, which represents largecaps. However, investors normally invest in diversified equity portfolios that also include mid-cap and small-cap funds. Therefore, we did the above exercise with S & P BSE 500.
The above graph shows the movement of lump sum, SIP and step-up SIP when you invest in S & P BSE 500. S & P BSE 500 includes mid-cap and small-cap companies as well. Even by investing in S & P BSE 500 you can be a billionaire. In fact, the investment amount required is lower compared to investment in S & P BSE Sensex. While investing in S & P BSE 500, you need to invest Rs6.49 crore in lump sum, Rs8.11 lakhs per month in SIP and Rs5.35 lakhs per month to start with via step-up SIP. Though the investment amount is less compared to S & P BSE Sensex, yet the investment is considerably on the higher end for an average salaried person.
As we can see from above graph, when you invest in S & P BSE Sensex, in terms of XIRR, SIP proves to be a better route to become a billionaire compared to lumpsum and step-up SIP. But when it comes to investment in S & P BSE 500, in terms of XIRR, lumpsum proves to be better than SIP and step-up SIP.
Impact of Falling Market
What if your 20-year period ends in a falling market? As we know, no one can predict the market. Hence, there are possibilities that your investment horizon might be in a falling market as well. In such a situation, would Rs8.04 crore lump sum or Rs8.51 lakhs SIP or Rs5.47 lakhs step-up SIP be enough to make you a billionaire? Let us find out. For this particular study we need to factor in the effect of any global financial crisis. Hence, the investment period would now be for the period 1988 to 2008.
As we can see, lump sum of Rs8.04 crore did help you to become a billionaire. In fact, it accumulated to Rs175 crore. However, with the same amount, SIP and step-up SIP failed to reach the milestone of Rs100 crore. The reason why lump sum is able to accumulate more than SIP is that the whole investment remains invested for the entire investment horizon. But, in case of SIP and step-up SIP you get the benefit of risk management. This means that the investment volatility would be fairly low compared to lump sum investment. Also, this is because SIP has an added advantage of rupee-cost averaging. That said, it seems to be quite difficult for an average salaried individual to invest such a big amount whether it is through lump sum, SIP or step-up SIP.
The Strategy
So, the question is how to become a billionaire if the investing route requires a lot of money? As mentioned at the beginning of the article, there are two ways: one is to earn and the other is to invest. But as investment requires higher amounts, you either need to earn or have a combination of both. Let us take the example of a redwood tree and bushes to understand it in a better way. Redwood sequoia trees are the tallest trees in the world with a typical height of more than 300 feet. On the contrary, bushes have multiple stems and branches that spread out from the base. Hence, they are not very tall. Bushes are no more than a few feet high. Even the tall bushes typically don’t grow higher than 10 to 20 feet.
It is interesting to know that the world’s wealthiest people share commonalities when it comes to building wealth. Take into account Bill Gates’ share in Microsoft, Jeff Bezos’ share in Amazon, Mark Zuckerberg’s share in Facebook, Larry Page and Sergey Brin’s shares in Alphabet and Walton family’s shares in Wal-Mart. A majority of those on the Forbes list of billionaires didn’t get there by diligently saving and investing in a diversified portfolio. In fact, similar to the redwood tree, they remained concentrated and focused in a single direction for a very long time. Also, for most of them, their primary wealth asset is still their own share in their company.
However, in the world of investing, most people save and accumulate wealth like a bush. Each part of savings is allocated to a diversified portfolio which allows us to grow and build up wealth over time. You probably won’t come across a billionaire who has adopted a bush strategy to amass wealth. You will find that most billionaires have become so either by way of growing wealth like a redwood tree or a combination of the redwood tree and a bush. Therefore, investing in mutual funds or any other investment avenue, for that matter, doesn’t make you a billionaire unless you have a huge amount to invest.
Conclusion
As is rightly said, there is no short-cut for wealth creation. Even our study shows that one can indeed become a billionaire but would need to invest quite a huge amount to reach there. And it doesn’t matter whether you invest via lump sum, SIP or step-up SIP. In fact, our study was based on the assumption that one invests 100 per cent in equity. As we know, every human being is different and so is his or her risk tolerance level. Hence, one wouldn’t be dedicating 100 per cent of investment to equity. On the contrary, a part of it would be in debt and another part in equity. Therefore, with such an approach you can fulfil your financial needs such as child’s education, marriage, your retirement, international vacation, etc. But it won’t help you to be a billionaire!
❝Majority of those on the Forbes list of billionaires didn’t get there by diligently saving and investing in a diversified portfolio.❞