Generating a return of seven digits from a small savings amount would require a substantial investment horizon and a high rate of return. Here are a few examples of how small savings can potentially turn into a large sum over a long period:
Compounding Interest
Saving a small amount on a regular basis and investing it in a savings instrument that offers compounding interest can lead to significant growth over time. For instance, investing Rs. 5,000 per month for 30 years at an interest rate of 8% can potentially grow to over Rs. 1 crore. Compounding interest refers to the process of earning interest on both the principal amount and the interest earned on it over time. In other words, it is the interest earned on the interest accumulated on an initial investment. For instance, let’s say you invest Rs. 10,000 at an annual interest rate of 10%. At the end of the first year, you will earn Rs. 1,000 in interest, bringing the total value of your investment to Rs. 11,000. If you leave that money invested and earn another 10% in the second year, you will earn Rs. 1,100 in interest, which will bring the total value of your investment to Rs. 12,100. As you can see, the interest earned in the second year is not just on the original principal amount of Rs. 10,000 but also on the interest earned in the first year. This process continues, and over time, the amount of interest earned on the interest accumulated can add up significantly, leading to exponential growth in the value of the investment. Compounding interest is a powerful tool that can help individuals grow their savings and investments over the long run. It is commonly used in various financial instruments, such as fixed deposits, mutual funds, and other savings schemes.
Investing in equities
Historically, equities have provided higher returns compared to other asset classes over the long run. For instance, investing Rs. 10,000 per month in an equity mutual fund for 30 years at a compounded annual growth rate (CAGR) of 12% can potentially grow to over Rs. 1 crore. Investing in equities refers to buying stocks or shares of a company listed on a stock exchange with the expectation of earning returns in the form of capital appreciation (increase in stock price) and dividends (share of profits paid out to shareholders). Equity investments are considered to be high-risk investments as the stock prices are volatile and can fluctuate rapidly due to a variety of factors, including company performance, economic conditions, and geopolitical events. However, equities also have the potential to provide high returns over the long run compared to other asset classes like bonds or fixed deposits. Investing in equities can be done in several ways, including buying individual stocks or investing in equity mutual funds. Equity mutual funds are managed by professional fund managers who invest in a diversified portfolio of stocks to reduce the risk of concentration in a single stock. It is important to note that equity investments require patience, discipline, and a long-term investment horizon. Investors should be prepared to ride out the short-term volatility in the markets and stay invested for an extended period to benefit from the power of compounding. It is always recommended to consult a financial advisor before investing in equities to determine the appropriate asset allocation and investment strategy based on an individual’s risk tolerance and financial goals.
Investing in real estate
Real estate is another asset class that can potentially provide significant returns over the long run. However, it typically requires a larger investment amount upfront. Investing in a property that appreciates in value over 20-30 years can potentially result in a seven-digit return. Investing in real estate involves purchasing and owning property with the intention of generating returns in the form of rental income, capital appreciation (increase in property value), or a combination of both. Real estate investments typically require a substantial upfront investment, and the returns are generally realized over a longer period. However, real estate can be a valuable addition to a diversified investment portfolio, providing benefits such as income stability, capital preservation, and inflation protection. Real estate investments can be made directly by purchasing a property, or indirectly through real estate investment trusts (REITs), real estate mutual funds, or exchange-traded funds (ETFs). Direct real estate investments require significant capital, and investors need to consider factors such as location, property type, rental yields, maintenance costs, and property management expenses. Real estate investments also carry certain risks, such as vacancies, tenant default, and fluctuations in property values. Indirect real estate investments such as REITs or real estate mutual funds offer investors exposure to a diversified portfolio of properties, managed by professional real estate managers. These investments allow investors to participate in the real estate market with smaller investment amounts, lower risks, and easier liquidity. Real estate investments can be a valuable long-term investment option, but it is important to carefully evaluate the risks, costs, and potential returns before investing. It is always recommended to consult a financial advisor before making any real estate investment decisions.
It is important to note that all investments come with risk, and past performance does not guarantee future results. Therefore, it is always recommended to consult a financial advisor before making any investment decisions.
