The Deontic Principle – 15:15:15

The Idea of achieving a savings kitty of Rs.1 Crore will definitely interest every investor. In my interaction with a number of clients and prospects, I have observed that, the thought of making it to the Rs.1 Crore savings mark brings about a feeling of achievement. A feeling, that they have arrived at an important milestone in life.

The “Magic Figure of Rs.1 Crore” is a major psychological benchmark in the middle class and the upper middle class strata of the Indian society. In our country we have always built about an aura around this figure of “Rs. 1 Crore”. People who cross this benchmark are popularly known as a “Crorepati”. This is very similar to what the western world refers to as a “Million Dollar Man”

So, let me show you a road-map to achieve this dream figure of Rs. 1 Crore. Is it Easy? Perhaps yes! I would rather put it this way… It is not so difficult either.

It is here, I would like to introduce this principle which I call “The Deontic Principle of 15:15:15”. If this principle is followed religiously. This magic figure of Rs.1 Crore will seem to be definitely achievable. So, what is this “Deontic Principle”? Let’s see…

15:15:15 – The Deontic Principle

The First 15 here refers to a savings commitment of Rs.15000/- every month.

The Second 15 here refers to a time commitment of 15 years (180 months).

The Third 15 here refers to an investment return of 15% Compounded Annually.

So, the “Deontic Principle – 15:15:15” essentially states that if a person commits to a monthly savings of Rs.15,000/- for a time period of 15 years (180 monthly installments) with a targeted return of 15 % Compounded Annually, the resultant investment kitty will be worth the magic figure or Rs.1 Crore. Refer to the table 1 to get an understanding, as to how a monthly savings contribution of Rs.15,000/- grows to become Rs. 1 Crore at various earnings rate.

Table 1

Is it Possible ? Lets go in deeper…

The first and second variables, money and time are things that we can commit to or rather, are under our control. It is only the third variable of 15 % compounded annual return that needs some thought and discussion. This third variable seems a little tricky and needs some careful planning and execution. This is where the role of an advisor comes in. One needs to have a strong commitment and an equally strong belief in this methodology to reap the benefits. Let’s take a peek in the past and look at the historical returns from investments into a few broad based, diversified equity instruments.

Let’s take a look at the SIP (Systematic Investment Plan) returns of a few randomly selected equity Mutual Funds that have been around. I have taken a random sample of equity schemes that have completed at least 10 years.  The results have been presented in Table 2.

Table 2

We notice here that, traditionally, long term equity investments have given returns in excess of 15%. Here I define ‘Long term’ as periods above 10 years. Though, we observe here from Table 2, that  the annualized return from investments for a period of 15 year has been in excess of 20%, “The Deontic Principle” is targeting a return of 15% p.a. Now, even in situation where the targeted annualized return slips to 12% p.a. the targeted goal of Rs.1 Crore gets delayed by 2 years.  Instead of achieving it in 15 years it will be achieved in 17 years (refer table 1).

 But, I must state a caveat here. Though, the schemes shown in table 2 are ones that have delivered over time. There may be instances where due to various reasons some schemes have got their fund management grossly wrong and have failed to perform at the desired level. It is here that the role of a qualified Advisor comes into picture. Though the principle seems very simple to execute the trick here is to constantly have a bird’s eye view on the quality of schemes selected and to take necessary corrective action when some things go wrong. In my opinion, if Large Cap schemes offered by reputed AMC that have been around for at least 10 years are selected, they should do the trick and fulfill your dream of making it to the Rs.1 Crore Savings mark.

Follow the Rule: No matter what happens to the stock markets stay committed to “The Deontic Principle”, stay invested and continue your commitment towards investing Rs.15,000/- per month. your goal is bound to be achieved.

 Happy Investing !!!