Mutual fund is a great financial tool that allows retail investors, who don’t have in depth knowledge of how market works, to invest in market at a small capital. Systematic Investment Plan (SIP) and lump-sum are routes available for retail investors while choosing to invest in the equity market via mutual funds. While the former allows the investor to put a small amount, for example Rs 1000 per month/quarter, in mutual funds, the latter allows the investment of a big amount all at once.
If an investor opts to put their sun of Rs 10 lakh for a 10-year investment horizon in one particular mutual fund, it could create an enormous difference depending on several factors.
But how much could Rs 10 lakh actually become if it is invested in a mutual fund and left untouched for a decade?
Let’s understand this returns dynamic with an illustration.
For this case, we are taking three assumed annual return of 8 per cent, 10 per cent and 12 per cent.
If one puts Rs 10 lakh and leaves it untouched for 10 year, then at 8 per cent annual return, the amount would turn to around Rs 21.59 lakh. At 10 per cent, the corpus could reach approximately Rs 25.94 lakh, while a 12 per cent annualised return would take it to around Rs 31.06 lakh.
| Assumed annual return | Value after 10 years |
|---|---|
| 8% | ~Rs 21.59 lakh |
| 10% | ~Rs 25.94 lakh |
| 12% | ~Rs 31.06 lakh |
Are you confused how it works?
If one has put Rs 10 lakh at a specified return, 10% in this case, then value after Rs 10 years would become Rs 25.94 lakh. Which means the wealth created from your investment would be Rs 15.94 lakh.
Annualised return is important, as stock market is volatile, with returns oscillating sharply. In some years, the returns could be muted and in bad scenario negative, while some years would bring sharp rally with over double-digit returns. Annualised return rate helps to mean this zig-zag returns to calculate the returns on investments in the long-term horizon.
Scourge of inflation
While calculating the investment strategy, investors tend to forget – the scourge of inflation. Inflation, which simply means rising of general prices of goods and services on an annual basis, decreases purchasing power of their holding money eventually.
So what one could buy with a note of Rs 100 a decade ago would realise the little he could purchase how.
Like this, the value of Rs 25.94 won’t have the same purchasing power as of today. Thus, it’s very important to use an assumed inflation rate while calculating the return or making investment strategy.
At 6% inflation, Rs 25.94 lakh received after 10 years would have purchasing power equivalent to roughly Rs 14.5 lakh today.
Lump sum vs doing nothing
Investors must know that mutual funds are marked-linked products and returns are not fixed. It’s high risk and high-reward financial instrument, with the actual value after 10 years of your investment depending on various factors.
Still one should never ignore the power of compounding. Mutual funds is still one of the best ways an investor can invest in stock market unlike picking an individual stock without having in-depth knowledge of the market. It’s your risk capacity and preference to how you wish to invest in mutual funds – SIPs or lump sum.
Disclaimer: The calculations mentioned in this article are based on assumed rates of return and are for illustrative purposes only. Mutual fund investments are subject to market risks, and actual returns may vary depending on market conditions and the performance of the scheme. Investors should assess their risk appetite and financial goals and consult a qualified financial adviser before making investment decisions.