How Equity Can Help You Retire Rich?

When you talk of equities, you normally hear the stories of how stocks like Wipro or Havells have created wealth over the years. For example, an investment of Rs. 1,000 in Wipro in 1980 would be worth nearly Rs.60 crore today. Similarly, and investment of Rs.1 lakh in Havells in 1997 would be worth Rs.32 crore today. There are scores of other similar stocks like Eicher Motors, Escorts, TVS Motors, TTK Prestige, Symphony etc which have multiplied anywhere between 50 times to 200 times over time. But, let us first shift to the core idea of why we are discussing all these stocks when we talk about retirement.

The 3 considerations in retirement

Irrespective of when you plan to retire, it is always better to start planning early. That is what retirement planning is all about. Here are the 3 key considerations.

• You need to take a long term approach towards planning your retirement because that is when the power of compounding works in your favour. The longer you hold on to quality investments, the more the returns compound and increase wealth.

• Retirement is all about making small money work hard. That is only possible through equities. For example, an equity fund can give returns of around 13-15% on an annualized basis. You can’t plan your retirement with a 6% liquid fund.

• For planning your retirement, risk is as important as returns. You can argue that equity is high risk but if you look at quality portfolios of equities, they tend to almost negate downside risk if equities are held for a period of more than 7-10 years.

But, how can equities help us compound retirement corpus?

It is hard to fathom the power of compounding but we can grasp that better with a hypothetical illustration. Let us look at how yields and time make a huge difference to your retirement corpus creation. Since lump sum investments are not practical for most people, let us assume that the investor does a monthly SIP of Rs. 5,000 under different options.