"What have you been smoking. . . what rate of return did you assume. . . by investing Rs 2,800 per month you end up with 9.45 lakh at the end of 6 years. If you can make those kinds of returns - you wouldn't be wasting your time writing articles on rediff. . ."
The above is one of the comments (thankfully not a typical one) on my article How to invest in stocks WITHOUT any Risk.
The idea was simple. Invest your entire capital in a fixed income scheme and invest the returns (interest) therefrom in equity. This way your capital remains intact (over the period of investment), yet you can benefit from the equity upside, if any.
We ran some numbers and found that an amount of Rs 2,800 per month invested over a six year time frame really grows to an astounding Rs 9.45 lakh (Rs 945,000).
Most readers expressed disbelief. And not surprisingly, because the numbers were indeed unbelievable.
Here's another reaction to the article I wrote: "I have read the article in detail and really surprised to know that Rs 168,000 invested over a period of 6 years (monthly Rs 2,800) can fetch you a return of Rs 945,000. This is simply not possible. What is the basis of arriving at the figure of Rs 945,000?'
And one more: "Systematic Investment Plans (SIPs) get you 5.625 times your investment in 6 years' time. Mutual funds investing in shares do not invest in 1 or 2 scrips, but in a number of scrips. If all the scrips make 5.625 times in 6 years, then we would like to know the details of such scrips and their appreciation in last 6 years. This is an eye wash. Better be cautious."
I am not angry or even surprised at such reactions. For, sometimes it is really easy to underestimate the power of compounding: a power so great that Albert Einstein called it the eighth wonder of the world.
Since several other readers have (albeit more politely) expressed a desire to understand how we reached the above conclusion, in this article we will take you through the methodology.
We had used the example of Franklin Templeton Prima Fund in the article. Rs 2,800 is invested in September 2000 in this fund. At which time, the NAV (net asset value) of the scheme was Rs 22.90. Consequently, the investor buys himself 122.27 units. Next month the NAV dropped to Rs 21.14 due to which Rs 2,800 purchased 132.45 units. Further on, in November 2000 the NAV fell to Rs 19.36 and so 144.63 units were acquired and so on.
Continuing the SIP this way for six years, the investor will end up with a total of 5,368.91 units. In September 2006, the NAV of the scheme was Rs 176.04. A simple multiplication will yield you the amount of Rs 9.45 lakh.
And please note that these are published factual figures and not an assumption or forecast.
It is not as if Prima was the only fund that managed to deliver such returns. A similar investment in, say, Reliance Growth would have returned a higher amount of Rs 11 lakh (Rs 1.1 million), whereas investment in Reliance Vision would have yielded Rs 9.83 lakh (Rs 983,000).
The point is not the funds per se, but the fact that regular investment achieves wonders. I would take pains to point out that it is not as if I am looking forward to the past. The article wasn't meant to entice the reader to invest so that he or she can expect similar returns in the next six-year period.
Instead, the point was to showcase and put into perspective the magic of regular investment, over a period of time, in the correct investment instrument.
No one -- repeat, no one, can predict what the return would be like over the next six-year period. Perhaps it could be so good that the Rs 9 lakh would seem like a pittance. Perhaps not. In Harry Truman's words, "The only new thing in the world is the history we don't know."
People want their money to work hard for itself. I say, let the money relax, you work hard.
Follow the three canons of successful investing:
- Invest regularly, as much as you can, whenever you can.
- Identify the proper instruments to invest in.
- Invest over time, don't get in and get out frequently. This hampers the journey and, when it comes to investing, believe me, it is the journey that is more enjoyable than the actual destination.
The first and the third principles stated above are a matter of discipline and conviction. This is entirely up to you, so long as you are up to it.
But what about the second one? Which is THE investment to make? In other words, how does one identify the Primas and the Visions of the world?
That too is relatively simple. You know Sachin Tendulkar or Rahul Dravid are good batsmen. You don't need anyone to tell you that. So, why can't you use the same principle while choosing your investment?
Take a look at the track record. Work out for yourself what the performance of the funds has been over a period of time. Do your homework. And just like Tendulkar having a lean patch doesn't make him a lesser batsman, don't get swayed by a three-month or a six-month performance number. Test of time is the only true test.
At the same time, now and then look out for the Gangulys too. (No disrespect to Sourav fans). It is just that it is true what they say in the offer documents about past performance being no guarantee of future results. A fund manager (unlike some of our cricketers) cannot afford to lose form and yet expect to be one of the chosen ones.
And let me end by saying that I am not trivialising the art of investment by comparing it to cricket. Or the other way round. Its an analogy for the mind to digest. After all, be it of human beings, companies or investments, pedigree, reputation and character alone are what make or break you.
And by the way, just so you know, I don't smoke. Now that would be a waste of time.
The writer is Director, A N Shanbhag NR Group, an investment and tax advisory firm. He may be contacted on sandeep.shanbhag@gmail.com
