Find out how much return your investment should give to retire at your desired age in just 2 mins

The other day I received an SMS saying invest Rs. 5,000 every month till the age of 60 and get Rs. 30,00,000 lump sum and Rs. 25,000 every month post the age of 60. I am sure every one of us is bombarded with these kinds of messages every other day. There are several online calculators available to check how much you should invest now to get the desired amount at the age of retirement. But what if you don’t have that much amount to invest in? Also, do you know much return your current investment should earn to generate a corpus for your retirement?  To be honest, I didn’t know so I guess we are sailing on the same boat.

So without wasting any time, let’s see how can you use our tool to know the Return on Investment (RoI) required on your current investment to generate a corpus for your retirement in just 3 steps. Download the sheet from here.

What are the objectives of this sheet? 

The whole purpose to build this sheet is to tell you how much return your investment should earn so that you can generate the desired corpus for your retirement. 

What are the questions will be answered by this sheet?

You will know how much RoI needs to be earned on your investment. You will also know the amount you require to retire with. It also calculates your per annum post-retirement expense.

For illustration purposes let us assume there’s someone called Mr. X. He is 25 years old. He wants to retire at the age of 60 and expects to live till the age of 85. His current salary is Rs. 95,000 per month.

Follow the below steps to get your questions answered:

Step 1: Enter your personal details

Here, you are required to enter your current age, age at which you want to retire and age till which you are expected to be alive. Please note, this sheet is designed for a person who is more than or equal to 25 years old and expected to live till the age of 99.

Step 2: Enter your per month income and expense

In this step, you are required to enter your current per month salary. Expected every year increment in salary and bifurcation of a monthly expense. Please note: It is required that saving as a percentage of income to be more than or equal to 15% (Otherwise person either has to increase his salary or reduce his expense)

Step 3: The easiest step among all

One only has to press submit the inputs enter by one.

The output of the sheet:

The Output indicates how much person has invested till retirement and what RoI he should target on his investment. If a person manages to get the RoI calculated by this sheet, he can achieve his corpus by the time he retires. ( Basically, in this case, Mr. X has invested Rs. 1.44 Cr. till 60 years and he has managed to get RoI of 12.44% on his investment. So at the age of 60, he has generated a corpus of Rs. 20.26 Cr. which will take care of his post-retirement expense.)

This graph indicates how generated corpus will be depleted over a period of time
This graph indicates the proportion you have invested and corpus generated by your investment with RoI calculated by the sheet

So those who are interested to know the math behind this, here we go!

Following are the few assumptions made by me while preparing the sheet. Please refer the same.

Let’s look at the Expense tab:

Expense sheet indicates how your expense will grow over a period of time. To be on the safer side I have considered 13 months as annum. I have also considered growth rates of each expense heads will remain the same for a decade and will be revised by 0.5% compounded annually (Can be edited as per your requirement). 

Salary and investment tab:

We know our annual salary and annual expense. Annual saving is just a difference between income and expense. I have kept 5% (editable input) aside as an emergency fund which will be kept aside in savings account. Available per month funds to invest is remaining funds in hand after the emergency fund is kept aside. Now, Corpus generated is a sum of funds in hand and money parked in a savings account. (Note: Funds in hand should fetch min. RoI as shown in the output box)

Corpus tab:

Corpus sheet indicates post-retirement annual expense and how that corpus will be depleted over a period of time to cover your expense. Here I have considered the generated corpus will fetch 3% post-tax return on the corpus (Pre TAX savings return is 4% -editable input).

Hope this article has helped you to understand your target RoI on current investment and required corpus to retire on desire age. Let me know topics you would like me to cover in next post in the comment section below.

Kartik Tripathi
Forerunner- Finvert
(M.Sc. Finance, NMIMS – Mumbai 2018-20)

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Should I Invest In Mutual Funds or ETF’s?

It’s an age long debate as to which is considered to be better in terms of an Investment Avenue. While both happen to be reasonably good options, due to its inherent nature, a lot of times ETF’s and Mutual Funds can be used interchangeably. In reality however, it is important that these asset classes have their own nuances that make them inherently different. In our innaugral post at Finvert, we will break down how these two securities are different and what are the things an investor should consider whilst investing in any one of the two.

What are ETF’s (Exchange Traded Funds)?

As the name suggests, an ETF tracks a particular index and allows the investor to buy the entire index as it were a stock. An ETF is therefore listed on an exchange and requires a Demat account for buying and selling of the fund. This lead to the name, ‘Exchange traded fund’. Due to this, ETF returns do not significantly vary from the overall market performance. ETF’s makes an ideal investment opportunity for Investors looking to beat inflation and expecting standard market performance based on historical data. The main attraction of an ETF is an overall lower turnover and expense ratio. These factors have contributed to high popularity enjoyed by ETF’s in the U.S. but not so much in India. The size of ETF’s in India seems poultry when compared to the AUM (Asset Under Management) of the countless mutual funds on offer in the market right now.

What are Mutual Funds?

Mutual Funds are a collection of a pool of money from different investors creating a fund which is actively/passively managed by a fund manager whose primary aim is to beat the returns offered by the stock market. Mutual funds can invest in various securities including stocks, commodities or bonds. A fund manager routinely changes the asset composition multiple times in a year so as to get the desired returns. This means higher turnover and hence, high expense ratio. Price is calculated daily at the end of the day based on fund performance. The entire money invested is then converted into units and sold for money.

Mutual funds have burgeoned in terms of popularity in India due to the fantastic returns offered by the same in the past few years. Here we have taken some of the high performing ETF’s and Mutual funds of well-known fund houses and analysed the fund on various factors which include its returns, the expense ratio, percentage of stocks that are overlapping, etc. For a more like-to-like comparison, an ETF and a large-cap mutual fund is selected from the same fund house. Likewise, five ETF’s and five mutual funds are selected for the purpose. The returns calculated are rolling returns and also states the expected amount return when 10,000 are invested in the said scheme. 

Comparing a year’s return between securities is too short a term to perform a comparison. A three or a five year term is enough time to perform a comparison. Looking at the table, the most important distinction between the two is expense ratio. Where mutual funds generally charge anywhere around 1.75-2.5%, ETF’s get away with 0.05-0.15% as commission charged due to its passive nature. Add to that the turnover ratio (number of times stocks are bought and sold) of a mutual fund is high which also increases the overall expenses of the mutual fund. Things become interesting when tax comes to picture. Essentially, mutual funds are taxed yearly whereas capital gain tax on ETF’s can only be taxed when they are sold.

Overlapping of stocks in the security portfolio is another interesting thing between an ETF and a mutual fund. For eg., ICICI Prudential Nifty ETF and ICICI Bluechip fund direct growth have 74% of the stocks in their kitty that are similar. So ideally the returns for the same should match to a certain extent and that is very much the case for a 3 year period. But the mutual fund at 15.77% still manages to outperform ETF at 12.91% in the long term five year period. Another

The most important purpose of any investment is the returns generated and this is where mutual funds outperform ETF’s most of the time. The return is high but when factors such as expense ratio, stock turnover and tax come to picture, both the securities seem to offer similar returns. In some cases, ETF’s actually outperform mutual funds which question the whole idea of alpha generation in mutual funds in the first place.

While all this may look like a good picture for ETF’s, the reality is that ETF’s fail miserably in one important factor for any investor viz. which is liquidity. While mutual funds have grown to be very popular in India, ETF’s are very new and minuscule in comparison. So whilst the buying aspect may not be a problem, selling an ETF might be. So the investor needs to be cautious of this fact beforehand. But this being the stock market, no word is absolute and so both the options are to be considered by the investor while looking for an asset class to invest in.

This is not to be considered financial advice in any manner. Do your research before investing in any of the mentioned assets. Our work is limited to educating our readers regarding the same.

Kartik Tripathi
Forerunner- Finvert
(M.Sc. Finance, NMIMS – Mumbai 2018-20)
Ashish Tekwani
Forerunner- Finvert
(M.Sc. Finance, NMIMS – Mumbai 2018-20)