Will magical figure of Rs 1 crore be enough for your goal?
For example, a 30-year-old man is investing in a few equity mutual fund schemes to create a retirement corpus of Rs 1 crore in 20 years for his early retirement at 50. Do you think the money would be enough to take care of his retired life? Most likely it won't. This is because the person has picked up a ballpark figure, that is just an approximation of what he thinks would be enough for his retirement. The person hasn't actually worked with real numbers.
For example, if his annual living expenses are Rs 6 lakh, he would need Rs 19.24 lakh every year to maintain the same standard of life after 20 years. We have assumed an inflation rate of 6 per cent to calculate the future value of the goal. That means the person needs around Rs 3.25 crore to generate Rs 19.24 lakh at the rate of 6 per cent.
If the person is assuming Rs 1 crore would be enough to take care of his retired life, he would be in for a rude shock. It would be too late when he finds out that the corpus can only create a fraction what he needs for his subsistence. Luckily in our example the person is planning for an early retirement. He can continue to earn and invest for the next 10 years. For someone actually retiring at 60, that is not an option. That is why mutual fund investors should work with real numbers to avoid future shocks.
That brings us to the next ballpark figure in the lives of many mutual fund investors. Many of them believe that their regular investments, irrespective of the quantum, would be enough to create Rs 1 crore. Again, it is a sad assumption. If the protagonist works with actual numbers, he would find out that he needs to invest Rs 32,527 per month to create the target corpus of Rs 3.25 core in 20 years. Not Rs 10,000 or 15,000 he is investing currently. We have assumed a return of 12 per cent.