How to accumulate a million dollars with minimal risk - Motilal Oswal
How to accumulate a million dollars with minimal risk - Motilal Oswal

How to accumulate a million dollars with minimal risk

Let me start this article with a rhetorical question. What is the kind of return that one can expect from a stock? The answer would be that it would depend on the stock. Let us take the example of one of the most amazing out performers of the 21st century, Eicher Ltd. Just consider the table below
 

YearPrice of EicherValue of 1000 sharesCAGR Returns2001Rs.17.50Rs.17,500N.A.2009Rs.210.00Rs.2,10,00036.50%2018Rs.29,000.00Rs.2,90,00,00054.70%


These are the actual prices of Eicher Motors over the last 17 years. Consider that if you had invested Rs.17,500 in the year 2001 to buy 1000 shares of Eicher Ltd. then you would be sitting on an incredibly valuable portfolio worth Rs.2.90 crore today. If numbers can be misleading, then look at the compounded returns that the stock has given over the last 17 years. Between 2001 and 2009 Eicher gave compounded annual returns of 36.50% but between 2001 and 2018, the stock gave compounded annual returns of 54.7% consistently over 17 years. That is what wealth creation is all about. To answer the question, had you purchased 2300 shares of Eicher in 2001 with an investment of Rs.40,250/- you would be sitting on a million dollars at the current exchange rate. It is that simple to become a dollar millionaire! Right; no you are wrong. For starters, you would not be keen to bet on Eicher in 2001 or most likely you would have exited along the way or your patience would have just run out. That is why wealth creation is not as simple as it seems. Is there a more elegant way around?

The answer could lie in targeting with a Systematic Investment Plan...
 Let us look at how to make a million dollars in the stock market. Let us also look at how to invest a million dollars and where to invest to get a million dollars. Obviously, you cannot become a dollar millionaire through a money market fund and will have to go for an equity fund to achieve the goal. Let us assume that you can invest Rs.20,000 per month and are good to invest for another 25 years. Considering the cycles of the market let us assume that the diversified equity fund can generate returns of around 14% annualized consistently. How would your wealth creation picture look like?

The picture is not too bleak for you. If you save Rs.20,000 per month for 25 years at 14% then you will end up with a corpus of Rs.5.45 crore. That is not bad but you are still short of your $1 million. That is assuming that the current exchange rate of Rs.65/$ sustains 25 years down the line. While the INR has traditionally depreciated against the dollar that trend may not continue forever as India has emerged as a strong player with annual GDP of $2.7 trillion. Let us assume that we are at a currency level of Rs.75/$ at the end of 25 years. That means we need to accumulate Rs.7.50 crore which means you will still be short by Rs.2 crore. What are the ways to enhance your corpus to Rs.7.50 crore at the end of 25 years?
 

ParticularsMonthly SIPCAGR GrowthTenureOption 12800014%25 yearsOption 22000014%27 yearsOption 32000016%25 years

 
The above table shows that there are 3 ways of targeting Rs.7.50 crore at the end of 25 years. Let us examine the feasibility of each of them

The first option is to increase the monthly allocation from Rs.20,000 to Rs.28,000 for the entire tenure. This is feasible for 2 reasons. Firstly, there is always scope to squeeze your budget a little more and make spending a residual item. Secondly, your income level is going to increase over time and you can factor in higher SIPs over time.

The second option is to increase the tenure from 25 years to 27 years. We need to be a little cautious here because we need to provide for risk reduction and shift to liquid assets in the last 3 years of the SIP tenure. So extending the tenure may not be really feasible from a practical standpoint.

The third option will be to target higher returns of 16% instead of 14%. History may be against you as this will entail higher risk and more of concentration risk in your portfolio. It is always better to be conservative when anticipating returns on equities.

Is there a model for identifying the next Eicher or Infosys?
Let us get back to equities. Even as mutual funds offer a more intelligent and systematic method of touching $1 million, can we have a model for identifying stocks that could become a multibagger like an Infosys, Eicher or Hero Moto over the long term. Here is a 5 factor model you can consider..

Is the company into a line of business that is likely to redefine the industry as well as the customer experience in the coming years?

Has the company created a unique moat or competitive advantage that will give it a sustainable advantage in the industry?

Is the company able to synchronize the romance of top-line growth with the boring reality of bottom-line growth and margins consistently?

Is the company following and adhering to highest standards of corporate governance and transparency with its shareholder and other stakeholders?

Has the company kept its quantum of debt and its equity size small so as to reward shareholders?

If the answer to 4 out of the above 5 questions is "Yes", then you could be seeing a stock that could make you a dollar millionaire in the next few years. The rest is up to you!

 

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