This is a sequel to the story of a girl who said ‘If I have 10 crores I will be rich’ story. This is a girl who got featured in Lokmat (Marathi newspaper) in a translated story. Here is the sequel. I had asked what could go wrong in the whole process.
Well the following things could go wrong:
1. She might stop her SIP based on somebody saying ‘markets are too high’ or ‘markets are about to fall’! – one of the worst crimes against compounding is the crime of stopping the process.
2. The property which she inherits may not appreciate at the rate of 10% p.a. which I have assumed. If interest rates in India are in the region of 7-8% and growth rate is sustained about 10% over the next 30 years (her career span) then the value of the house is like to reach say the levels that we assumed. Chances are we will not sustain such high CAGR rates for such long periods of time. Such high rates of CAGR cannot be sustained because of something called a ‘base effect’. Once a company or country reaches a particular size, the absolute growth may be good, but the relative growth cannot happen.
Also real estate as an asset class is impossible to predict because usage pattern changes. Her current house may have a single car park…soon tastes will change so people will pay fancy prices for a helipad, and other ‘necessities’ so even though real estate may go up, this location could stagnate…
3. She may give up her job- temporarily for having a baby or permanently as ‘husband is doing very well’ – and that could be the cause of her SIP stoppage.
4. Her husband may not want her to invest in equities – he may shift her to debt instruments – and she will go to sub-optimal taxable returns like her husbands!
5. This girl understands finance – hence the early start – but she has to keep herself updated and know how to make appropriate changes. Some active management skills (she actually has them) have to be developed.
6. Her parents may themselves remove money from the funds for her marriage – I am not saying it is right or wrong, but again this could be a genuine reason why the compounding got interrupted.
7. She may lose patience and decide to buy some luxury item with the accumulated money.
8. Currently all the accumulation and withdrawal are both free of tax..this may not sustain for a long time. So taxation can queer the pitch.
9. She may not keep track of the SIP payments and debits -for example the elss may lose shine if the DTC i s implemented in its current form. So some active participation may be necessary instead of a fill it fit it mode.
….readers are welcome to say ..what other reasons or causes exist…
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