# The Mutual Fund Show: These Strategies May Help Investors Become A Crorepati

###### What should be an ideal portfolio to become a crorepati? Mutual fund experts Kunal Bajaj and Amol Joshi explains.

Many people like to start their investments with a lump sum amount to meet their ambitious long-term targets. But an investor can create a corpus of about Rs 1 crore by investing a small sum monthly in mutual funds for nearly 25 years.

It’s important for an investor to continue investing, said Kunal Bajaj, founder and chief executive officer at Clearfunds. “Historically, various categories of mutual funds have grown investor wealth in the range of 7-17 percent on a 10-year average rolling return basis.”

Amol Joshi, founder at PlanRupee Investment Services, suggested another way to look at historical returns—measure the corporate profitability.

On this episode of BloombergQuint’s weekly series *The Mutual Fund Show*, the experts discussed two approaches—fixed time and fixed amount—that may help build a corpus of nearly Rs 1 crore.

### Fixed Time Approach

Consider an investor wants to build a corpus of Rs 1 crore in 10, 15 or 20 years assuming a growth rate 7, 10 and 13 percent.

Bajaj said the Rs 1-crore target is a function of three things—starting amount, interest rate and time period, while Joshi said continuing investing is the more important aspect to achieve the goal.

Here’s an analysis of how an investor can reach the Rs 1-crore target in each of the three cases.

### Fixed Amount Approach

Consider a person invests Rs 5,000 a month. Assuming a 13 percent rate of return, it will take nearly 25 years for the investor to build a Rs 1-crore corpus, said Bajaj.

If a person invests Rs 10,000 a month at the same rate, then the target can be achieved in nearly 20 years, Joshi explained.

Here’s an analysis of how an investor can achieve the Rs 1-crore target investing a fixed amount every month.

### Bajaj’s Strategy For Fixed Investment Approach

- Fixed systematic investment of Rs 10,000 per month.
- Of the total amount, Rs 5,000 should be invested in large caps, Rs 2,000 in mid caps and Rs 3,000 in short-duration debt funds.

**Bajaj’s Top Picks**

- ICICI Prudential Focused Bluechip Equity Fund
- IDFC Core Equity Fund
- L&T Midcap Fund

### Joshi’s Strategy For Fixed Time Approach

To achieve Rs 1 crore in 10 years:

- Invest Rs 50,000 every month.
- Split the investment into three categories—balanced advantage (Rs 10,000), hybrid equity (Rs 30,000) and multi cap (Rs 10,000).

**Joshi’s Top Picks**

- ICICI Prudential Balanced Advantage Fund
- Reliance Equity Hybrid Fund
- HDFC Hybrid Equity Fund
- Motilal Oswal Multicap 35 Funds

**Listen to the interaction with the experts to find out the ideal allocation to become a crorepati**

**Here are the edited excerpts from the conversation**

Would it suffice to say that these categories and these returns which are average of 10-year return would give a clear indication of what returns are expected and largely cover the investment returns in mutual fund categories?

**Kunal Bajaj: **Absolutely. We have tried and identified rolling returns which means from any point in time, any month which you started, and then you ended and closed on a 10-year basis. Taken that return, say from January 2001 to January 2010, average those, and then again from February 2001 to February 2010, average those. If you want to stay invested for a long period of time, then what would the return be. This is a fair indication that in some of the liquid fund or debt categories, you can expect around 7 percent or so this year, while in equity categories you can expect 13-14 percent.

**Amol Joshi: **There is another formula by which you can verify this data of market growth—corporate profitability and proxy for corporate profitability growth will be something close to GDP plus inflation numbers. If you take GDP from 7.5-8 percent level and inflation 4-5 percent, then 12-13 percent number is achievable from equities over medium- to long period of time.

Can you help us explain how can we have Rs 1 crore in 10 years?

**Bajaj: **Reaching Rs 1 crore is a function of three things. The amount that you start with, the interest rate or the earnings at the rate at which your investment compounds and finally how much time you give this because at the end of the day and unless you give it sufficient amount of time, you won’t be able to reach Rs 1-crore figure.

If you are able to invest in equities, which give about 13 percent or so over long-term periods, you can start with a smaller amount of Rs 42,000 and you will get there in 10 years. On the other hand, if you will get more conservative of how you will invest and expect 7-odd percent a year, then the amount which you need to start is significantly higher, like in this case it is Rs 58,000.

Would you agree that if these are the numbers then Rs 42,000 a month should do the trick for reaching Rs 1 crore if your investments are largely equity investments?

**Joshi: **Largely equity investments—because 13 percent can be generated only by equity instruments. Staying the course is the important aspect. One of the most important lines in investing is letting your investments compound. Longer the tenure you spend into investments, higher the compounding gains you will make. So, in first year the gain could be hardly 7, 10 or 13 percent. But that gain compounds over 9 years and give you a nice round figure of Rs 1 crore at the end of 10 years.

Another key thing is the market levels today are not that one would like to see. In those testing times, you should keep your investments going. You can’t pick and choose the time frame which you will invest because you are most likely to miss the bus.

How to reach Rs 1 crore in 15 years? The numbers vary dramatically because the power of compounding kicks in towards the last part of the tenure.

**Bajaj: **The big difference between this set of numbers and the previous one is just time. If we increase the duration from 10 years to 15 years, the amount you want to put away is only Rs 19,000 against Rs 42,000 for a 10-year period. It doesn’t matter if you don’t have Rs 42,000 to begin with. If you have even got the half of the amount and salary increases and bonuses will help you make up for some of those time differences, but there is no time like present. Don’t wait until you start saving Rs 42,000. But you can start right away.

Here staying the course is even more important because the power of compounding kicks of in a meaningful way maybe 7-8 years until 15 years.

**Joshi: **In the last year, your corpus is to grow to Rs 1 crore and this is at the rate of 10 percent. For the sake of calculation, 10 percent is the growth from previous year, including the contribution, your corpus is likely to be closer to Rs 90 lakh and on that of 10-11 percent return will take you to Rs 1 crore. This is only the interest or capital gains component. Over three years, your principal and gain is only Rs 10 lakh and that becomes only your interest component in last year. So, stay in the course, accumulate the amount. As the amount grows bigger, 10 percent of that bigger amount is higher with every passing year and that’s how you reach Rs 1 crore.

So, this number is not inflation-adjusted and telling you how to reach a crore in this numbers.

**Joshi: **Yes, it is constant. So, it is a fixed SIP approach. As your income goes up and you progress and make more money and more investable surplus, if you increase the number of SIPs going every year, even at an average of 8 percent, there is close to 80 percent reduction in the starting corpus.

So, if you look to become a crorepati in 20 years. At the end of the 20th year, your number reaches Rs 1 crore, but the key is if you are investing for 20 years and staying the course, the amounts go down dramatically.

**Bajaj: **Most people miss this aspect that time is the key component. You have to stay in the course. You could be at your first job and start saving from the first pay cheque— you got to have a little amount of money. You need to start today itself and stay to the course as long as your can.

Can you predict 13 percent average CAGR return for a period of 20 years?

**Bajaj: **Returns are hard to predict for such a long period of time. Returns are a function of GDP growth, corporate profitability and starting valuations. To remove the bias that would occur if we take very high starting valuation, what we have done is to let smooth this out and let’s take average return irrespective of when we started. We started from October 2007 to December, which was the previous peak of the market. And we also started from 2002 which was one of the lows of the market. We have taken that on extremes and said that on average, if you invest in equities, you get returns of 13-14 percent in equities.

If somebody has Rs 5,000 and has been okay in investing in equities, then how long will it take to become a crorepati?

**Bajaj: **He will be able to do it sooner. At Rs 5,000 a month, assuming 13 percent compounding, it will take 25 years. A lot of it also comes from the market spending. If you are lucky you will get there sooner because the returns that you have invested in would be much higher. But on a conservative basis, you will get to it in 25 years.

For somebody who has Rs 10,000 a month to invest, the number of years to become crorepati comes closer to at least 5 years.

**Joshi: **In the compounding interest formula, the most important factor is time. You cannot get there by magic. Once you increase your amount, you can shave off five years from your time. As your earnings capability goes up, please top it up.

What schemes would you recommend for this strategy?

**Joshi: **There are various types of schemes available. There are pure debt funds, equity funds and hybrid funds. We have 7 percent bracket which nobody will call it equity-projected return and it is debt return. A 10 percent return is the hybrid fund and 13 percent is pure equity. If I want to take one name for each of the returns bracket, I would say for debt space who wants to target 7 percent upwards return, you can look at Franklin Indian Short Term Income Plan. Somebody who wants to take the hybrid route, you can look at ICICI Prudential Balanced Advantage Fund, which is a balanced advantage and a dynamic asset allocation fund. It has various degrees of equity exposures depending on market valuation. If you want a fixed approach of two-third equity and one-third debt, then you can look at Reliance Equity Hybrid Fund. From a pure equity category, you can look at Motilal Oswal Multicap 35. I have given one name in each category.

So, you will put 25 percent amount in each of these categories roughly?

**Joshi:** Depending on the kind of return. If you are not an aggressive person and targeting purely the 10 percent bracket, not too less which is 7 percent and not too aggressive which is 13 percent, then the two schemes we are thinking about are ICICI Prudential Balance Advantage and Reliance Equity Hybrid Fund. A combination of these two or schemes similar to these ones will take you there.

**Bajaj: **When we are talking about such long-term periods of investment and we are talking about small amounts which hopefully shouldn’t hurt people, we are talking about Rs 5,000 a month, even if it takes a year longer to reach your goal. The right approach would be for long periods like 15-20 years, stick with equity as far as possible. You can introduce to short-term debt fund and ultra-short duration fund if you want to have it less volatile. I go with large- and mid-cap fund.