Thursday, March 30, 2006

Mathmagic of Compounding II: Kaise Banoonga Crorepati

How the Government of India forces you to be a Crorepati! (and that too while you are young!)

Since most of you did not have a father who invested Rs. 100000 for you at your birth at 10% returns on investment and hence cannot expect that amount to compound mathmagically to a Crore by age 50; or rather more likely, since most of you would not want to wait till you are 50 to become a Crorepati we are going to discuss other paths to reaching the magic figure of a Crore.

As we mentioned we will discuss how the Goverment of India forces its law-abiding, tax-payers or tax-return filers to become crorepatis. Is this the case of the benevolent economic dictatorial benefactor? Leave that mouthful, lets explore how...

Sec. 80 C of the Income-tax Act of India allows you to invest upto Rs. 100,000 in certain investment avenues. These investment avenues include ELSS schemes of Mutual funds. Suppose that you start trying to do tax-planning and investments under Sec. 80 C from age 21 onwards. So each year you are investing Rs. 100000 in ELSS mutual funds. Given the past track record of mutual funds (please note, SEBI Warning: Past performance is not indicative of future returns. Now that the token warning has been administered, back to mathmagic...) some of them have returned more than 35% for the last ten years or so. Given the expected boom in the Indian economy as suggested by the Goldman Sachs BRICS report and other similar studies it is to be expected that equity mutual funds with a long-term horizon and some intelligent investments in chosen companies at opportune moments (i.e. when the stocks are relatively cheap) will provide returns of 35% or so.

Assuming these we can show the following mathmagical returns:

Rate of Return - 35%
1 INR 100,000 21
2 INR 235,000 22
3 INR 417,250 23
4 INR 663,288 24
5 INR 995,438 25
6 INR 1,443,841 26
7 INR 2,049,186 27
8 INR 2,866,401 28
9 INR 3,969,641 29
10 INR 5,459,016 30
11 INR 7,469,672 31
12 INR 10,184,057 32

Is that Magic or what? I think it is maths and finance and economics and discipline and ... etc. etc. but you get the picture.

It is basically:

  • Starting early (at 21 or earlier if possible)
  • Sec. 80 C
  • Choosing the right Mutual Funds or other investment avenue
  • Waiting for Magic to happen!
At age 32 a person could become a crorepati by just going about doing his job and by legally not paying taxes!

Who says the Government of India is not interested in Social Justice? Of course, it is social justice to make Crorepatis out of ordinary people!

Now lets suppose our young Crorepati continues his investments. (I seriously doubt that our benevolent economic dictatorial government would be content allowing him to invest only Rs. 100000 per annum in future years. I can visualize in the long-term that the investment amount would be raised to Rs. 150000 sometime in the next 5 years.)

We will see the results of that in the next posting. Until then, happy dreaming and planning to save Rs. 100000 per annum under Sec. 80 C and also try to explore some good Mutual Funds which provide returns of 35% or more long-term. Hope you readers will post some of these...



Anonymous A said...

Interesting indeed.However, would there be no tax once the initial 1,00,000 becomes 1,10,000 and more as years pass by? is it all non taxed till we hit the 1 crore target?


Thu Apr 06, 01:46:00 PM  

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