All around the internet, you will find many of us would be asking about “Good or Best Mutual funds” expecting the higher returns in investments and that too in a few years.
But in all this, we do not concentrate on something else which ought to be your prime goal in the initial years of your investment journey!
This something else we mentioned above is “Your Saving Rate.”
Now, you must be wondering why we are talking about the Saving rate instead of Investment returns when everyone in the investment world is discussing returns.
Well, this is absolutely true that in the long term only the returns or consistent returns will help you in creating a corpus. However, in the short term how much you save that matters most.
For the same, we took an example here, which would explain to you how the amount of money which you can save is much better than what returns that invested money earns, in initial few years!
Suppose two investors are drawing the same monthly salary of Rs 50,000, which translates to an annual income of about Rs 6,00,000 Per annum. Their Income gets appreciated by 10 percent annually for the next 25 years. But, there are only two differences between them
- Investors A Can save 10 percent of his annual salary but receiving an exceptional return of about 15 percent on his Invested money
- On the other hand, Investor B being a conservative investor saves 20 percent every year. However, he’s receiving the return of about half ( eight percent only) what Investor A is getting on his Investment.
Put it simply; Investor A is saving 10 percent of his salary but getting a higher return. On the other hand, Investor B is saving 20 percent but getting back the FD type return ( 8 percent) on his Investment
So, now if i ask you which one of them would have a higher corpus after 5th years, 10th year or 15th years? Any guesses!
We believe, most of you will say here that Investor A will have more corpus than Investor B. This is because Investor A is getting a return almost double what Investor B is getting
But, do you know, You are wrong! And we have proof of this! we have added a calculation sheet below that will open your eyes today or change your perspective.
Investor A – Low saving rate – Higher Investment returns
Investor B- High Saving Rate- Low Investment Return
So, have you observed in the table above? In the 5th or 10th year Investor B was able to create a corpus of about 7.95 lakhs or 20.65 lakhs respectively. However, in the long term if you stay invested for more than 20 years, Investor A will earn more! because of power of compounding.
Why did this happen! That’s because Saving plays a much bigger role in the initial years in how much corpus you will have rather than the returns on investments.
What’s more! Your saving rate is in your control, which means you can control how much you can save every year, but returns are unexpected that is not in your control.
So, the bottomline is, that you should run initially for what is in your control- Saving rate, instead of chasing for higher returns.
However, this is true! in the long term, your returns will get you a bigger corpus in your hand, but in the initial years, how much you save that matters most!