Wealth Of The World

Is building a million-dollar (Rs 6.4 crore, in today’s terms) mutual fund portfolio an attainable goal, or a pipedream? Experts believe it is possible - but all you need is an iron-clad action plan, rock-solid commitment, fortitude to weather tumultuous markets, and the mental brawn to take on your worst enemy – yourself – every so often. Hey, we never said it was going to be easy!

Make no mistake; this isn’t advice on how to ‘get rich quick’ by speculating in the stockmarket. It is intended to serve as a useful primer to help mutual fund investors sidestep some of the common traps that could be holding them back from creating serious long-term wealth. Still determined to save that million? Read on.

Ready… Set… Goal!

Start by crunching the numbers and setting a well-defined goal. Close-end your goal by assigning it a clear target date. A million dollars is an ambitious target; so, define your goal timeline depending upon your saving capacity as it stands today. In all likelihood, your target date will need to be at least 15-20 years out.

Aashish P. Somaiyaa, MD, Motilal Oswal Asset Management Company, advises investors to be realistic about their annual savings targets, and to also consider their risk-taking abilities while setting financial goals. He is quick to add that financial planning, in the end, is nothing but a series of optimisation calculations – and utterly futile without the will to follow through with the action plan.

“What is difficult is for the individual to plan –and then demonstrate the will and ambition to follow through with it. Lots of people put it down to discipline, but I don’t think it is a discipline-related issue; investing success really comes from will and ambition,” he says.

Plan Your Monthly SIPs

SIPs continue to blaze a trail like never before. It is estimated that on average, 8.23 lakh new SIP accounts have been added each month this fiscal – with SIP inflows touching an all-time high of Rs 4,947 crore in July. The SIPs allow investors to participate in the equity markets in a controlled-risk manner, by averaging the overall cost of their units as markets invariably ebb and tide.

Somaiyaa believes that when it comes to creating serious wealth through SIPs, intent and commitment are the key. He observes that most investors tend to dilly-dally for far too long; spending far too much time evaluating options and not quite as much time in coming up with ways to add more to their monthly savings.

“Many individuals who may be earning a couple of lakhs a month, with a saving capacity of, say, Rs 50,000 a month invest just Rs 5,000 or Rs 10,000. I don’t understand these half-hearted attempts at creating wealth,” he says.

A back-of-the-envelope calculation reveals that you will need to run an uninterrupted monthly SIP of roughly Rs 65,000 per month for 20 years (assuming a 12 per cent CAGR; a highly likely scenario) to save a million dollars. If that sounds too steep for you, don’t fret! There is another option at hand.

Turbocharge Your Monthly Savings

Your other option, then, is to start with whatever surplus you have got, and step-up your monthly savings periodically. But there is a catch – left to your own devices, would you consciously increase your monthly investments every year? Or would you hold off at the very last moment; other, more pressing financial commitments taking precedence?

Here is where the SIP top-up feature comes in handy, according to Nimesh Shah, MD & CEO, ICICI Prudential AMC.

Shah firmly believes that a million dollars is a realistic savings target for individuals even in their mid- thirties, despite the fact that  they could just be starting out with mutual funds. But for this, they need to plan ahead and put their annual step-up percentage on auto-mode.

“The addition of the SIP top-up feature ensures that as investors’ incomes increase over the years, their monthly investments automatically keep pace – thereby helping them achieve their financial goals in time, if not earlier,” says Shah.

He is quick to add that it is essential that the product mix one chooses to channelise one’s monthly SIPs into, needs to be in sync with one’s risk appetite and recommended asset allocation. “For this, we would recommend that the investor consults with a trusted financial advisor,” he advises.

Vishal Kapoor, CEO, IFDC Asset Management argues that despite their volatility, not having sufficient exposure to equity funds over the long term is a risk. “It would be difficult for an investor to generate meaningful real returns without equity exposure. Moderate risk takers could choose a moderate asset allocation, which would have a lower amount of equity,” he says.

Watch Out For These Behavioural Traps

As you set out on your ambitious journey, you will need to be wary of a few classic behavioural traps that could potentially derail your plan. Your No. 1 foe would be the wealth-destroying “action bias”, or the innate tendency to want to “do something” with your investments constantly. Remember, when it comes to long-term wealth creation using SIPs, it is actually better to err on the side of being too passive, than to fiddle with and tweak your portfolio constantly!

Somaiyaa humorously points out that though his company spends big money every year expounding its core philosophy of buying right and sitting tight, investors most often continue to do the reverse.

“When people buy right, they end up booking profits too soon and when they buy wrong, they become long-term investors,” he says. It doesn’t take an investing genius to understand that in the long-term, this is a sure-fire recipe for poor investment performance.

Shah proposes a balanced approach to portfolio re-balancing. “Churning one’s portfolio too frequently, and not re-balancing one’s asset allocation at required times, without the guidance of a financial advisor, are both traps that investors should avoid,” he explains. Shah urges investors to understand that products such as equity mutual fund SIPs are actually “designed to benefit from volatility”.

“Once a goal is finalised, it is important to stay the course. During market volatility, investors can often panic and make rapid changes to their plan including stopping their SIPs or redeeming long -term investments. It is critical to accept volatility as part of the investment process,” advises Kapoor.

There is another trap to watch out for – the natural human proclivity to prioritise short-term desires over long-term ones. Since your goal of accumulating a million dollars is going to be several years away, the liquidity advantage of mutual funds could actually work against you, if left unchecked. Bear in mind that even seemingly “small” redemptions made, especially early on, can have a catastrophic impact on your final goal amount. Say, for example, you run a monthly SIP of Rs 65,000 for a year, but then pull out your corpus at the end of the 12th month to purchase a car. This would set you back by a whopping Rs 80 lakh from your 20-year goal of a million dollars! It would be in your best interest to keep this savings pool distinct and separate from your other savings pools.

Getting It Right

Someone wisely pointed out that achieving financial goals is simple – but not easy. Remember that your lofty goal of accumulating a million dollars through your savings is more akin to a marathon, than a sprint. You need to be in it for the long haul. Plan ahead, stay the course, put your annual step-up on autopilot, and watch out for your own behavioural traps – and you will be well on your way to being a mutual fund millionaire.