Triple your money and virtually risk free. Something all of us would like. Heres a bit of mathematics and a little bit of planning that can make a world of difference to your life. Typical Strategy Say you want to create an income stream of Rs 1 lakh per annum so that you have liquidity each month and you can spend that money to buy things or travel on an annual basis or just do what you wish. Lets say the rate of return we assume is eight per cent i.e. the return you would get by investing your money. Now you might wish that this continues forever,that you have to take minimal or no risk and that you want to have your capital back when you want it. To sum up; the rate of return taken is 8 per cent p.a. and you need Rs 1 lakh p.a. What you need to invest? That is very easy i.e. you divide Rs 1 lakh by eight per cent and the answer you get is Rs 12.5 lakh. Hence,if you invested Rs 12.5 lakh at the rate of return of 8 per cent p.a. you get Rs1 lakh per year. Further when you need the money just redeem your investment and you have your capital back. So what is so special about this? Most people would take the above strategy and think Rs 12.5 lakh is the answer. They would invest the money and the income is Rs1 lakh p.a. is done forever. Lets call this the typical strategy. While that is not wrong per se there is much more you can do with the Rs 12.5 lakh amount. The payoff in 20 years is Rs 20 lakh (Rs 1 lakh per year for 20 years) plus your capital of Rs 12.5 lakh. Thus R32.5 lakh in total. If we reduce this figure by Rs 12.5 lakh i.e. the original amount we stated with we have produced about Rs 20 lakh which is not even twice our initial investment over the period of 20 years. Alternate Strategy The logic here is not to invest the Rs 12.5 lakh directly into the eight per cent. Break up the investment in two parts of Rs 10 lakh and Rs 2.5 lakh. Investment of these amounts may follow different strategies. Lets call these as alternate strategy Part A and Part B. Alternate Strategy Part A The Rs 10 lakh may be invested at the rate of return of eight per cent. To produce an income of R1 lakh from this investment is a bit tricky. Along with interest at the end of each year we will need to use some part of the capital. Thus,in the first year this investment will produce Rs 80,000. Hence,Rs 20,000 will have to be taken off from the principal. Next year the principal take off will be a bit higher and the process would continue. At the end of 20 years you would have got about Rs 20 lakh i.e. Rs 1 lakh per year and you would be left with zero principal. Alternate Strategy Part B The Rs 2.5 lakh to be invested in a balanced method of 65:35 ratio of equity:debt. A balanced fund is also a good idea here. This amount will accumulate to a terminal corpus of about Rs 25-27 lakh at the end of 20 years. There is ample historical evidence to rest our assumption that this return will fructify. The payoff in 20 years as a result is Rs 20 lakh (Rs 1 lakh per year for 20 years) plus your Part B terminal corpus of R25 to Rs 27 lakh. Thus,Rs 45-47 lakh in total. If we reduce this figure by Rs 12.5 lakh i.e. the original amount we stated with we have produced about R35 lakh which is about three times of our initial investment. It could be even better and this is pretty much worse case scenario. Hence,at the end of the same time period better planning could actually give you better payoffs. By doing a little bit of mathematics you can quite easily triple the money instead of merely doubling it. The choice of your decision should be obvious. Words of caution Note that figures are rounded and approximate. Taxation may be applicable for income based on your overall income however the return of capital is tax free. Needless to say; do not try such financial acrobatics unless you are very sure of yourself. Consulting a professional who can help you with the creation and management of the above strategies may be a good idea. Author is Director,Transcend Consulting,kartik@transcend-india.com
