In this post, I am illustrating the difference between saving (Bank Deposits or playing safe) & investing (Equity / Equity MF or taking some risks) & how it pans out over time.

The approach that one takes determines whether one creates “wealth” or just “saves”.

Let’s take an example of 2 friends who at age of 25 start putting aside money for their retirement.

Friend 1, let’s call him Ram. He is risk averse (like 95% people I come across when I conduct my sessions) and chooses to save in Bank Deposits or similar return generating instruments. Return is assumed to be approx. 8%pa.

Friend 2, Shyam is willing to take risk and chooses to invest in a Diversified Equity Fund. Good MFs have returned 20% plus in 15-year time frame. But let’s be conservative and take the return to be 14%pa.

The difference of “6” is the difference between returns on a bank deposit & investment in a good MF.

Assuming both choose to invest a constant amount of Rs.5000/- per month from age 25 until retirement at 60 years, see how the money grows over time. Such a small amount can work magic over time. The table below illustrate this:

10 Years 20 Years 30 Years 35 Years
8% Bank Savings 9 Lacs 28.65Lacs 71 Lac 1.07 crore
14% Mutual Fund 12.5 Lacs 59Lacs 2.3 Crore 4.5 Crore

The numbers tell a story, isn’t it? Just Rs.5000/- monthly investment creates a corpus of Rs.4.5 crores over 35 years. And can you see how 6% more creates such a massive difference in corpus over time.

The amount invested can obviously be increased as income rises, and the corpus will only get bigger and fatter. A simple and easy way to create wealth over time and retire rich!!

Happy to take any queries on this one..Please send your questions for list of MFs or any other query.