Suresh and Sameer were two good friends working in the same company, earning the same salary and having similar responsibilities. They were about 22 years old each when they discussed financial plans between them. While Suresh was upbeat about investing, Sameer was content with a savings account. Now that both have become 10 years older, Suresh has accumulated a wealth of INR 17 lakh, while Sameer has savings worth INR 4 lakh. Imagine the difference of INR 13 lakh. Sameer, while happy for what Suresh achieved, is somewhat feeling bad for himself. An opportunity missed to make it big! While Sameer can still make a comeback, he will have to compromise a lot to catch up with Suresh.
Well, that was the story of Suresh and Sameer. But one could commit the mistake that Sameer did, and repent later.
Let’s just figure out why one should start investing early.
Reasons for Starting Early with Investments
Gives a Solid Base Upfront
Starting early allows you to earn a significant sum upfront when there are fewer responsibilities. And as time goes on, that wealth allows individuals a great deal of flexibility when their responsibilities arise.
Investment Amount Required for Retirement Corpus Remains Small
When you start investing early, you get more time to generate your retirement corpus. This means you can achieve the corpus by investing a small amount regularly.
For example, if you seek a retirement corpus of INR 5 crore, you can start investing INR 5,000 monthly in equity mutual fund SIPs for 40 years from your early 20s. But if you start investing when you are 30, the investment amount required to accumulate INR 5 lakh will be INR 18,000 on a monthly basis. And by that time, your responsibilities can be significantly higher, making it difficult for you to arrange that sum for investments..
Note – The investment amount calculation is made on the assumption that you would retire at 60. Also, the expected rate of return is 12% per annum.
The Effect of the Power of Compounding Remains Way More
The beauty of investing early is that you allow the money to grow way bigger than when you delay doing so. The Power of Compounding, which means the accrual of interest on the investment yield, remains much more when having about 30 years to invest compared to when having 20 years to invest.
Your Financial Habits Improve
Starting to invest early helps improve your financial habits. You begin to spend judiciously and understand the value of your money. Something that youngsters often discard. A nice balance between earning, saving and spending is important to achieve financial independence.
Why Should One Invest in Equity Mutual Fund SIPs?
Before diving to know why equity fund SIPs should be the way forward for investors like you, let’s just define equity mutual funds and SIPs separately.
Equity mutual funds are a type of investment where the money invested is pooled into a wide range of equity and equity-related instruments to generate capital appreciation. The proportion of investments across equities will differ based on the type of equity fund and its investment objectives. Equity funds can be broadly classified into large-cap, mid-cap, small-cap, sectoral, ELSS funds. While large-cap funds invest in stocks of the top 100 companies according to market capitalisation, mid-cap funds pool money in stocks of the top 101-500 companies according to market capitalisation. Small-cap funds invest in stocks after the top 500 companies according to the market capitalisation.
Sectoral funds refer to investments in stocks in specific sectors of the economy. For example, a banking fund will invest in banking stocks. Equity-linked Savings Scheme (ELSS) is a tax-saving equity mutual fund offering tax deductions up to INR 1.5 lakh in a financial year.
Let’s come to SIPs. They are an easy way to appreciate your capital over time. You can invest in SIPs monthly, quarterly, half-yearly or annually. However, it is advised to invest monthly as it brings financial discipline to your routine. You can invest as low as INR 500 monthly through SIPs. The best part about SIPs – the Power of Compounding and Rupee Cost Averaging.
The power of compounding helps elevate the invested capital by yielding you on the investment amount as well as its returns. Whereas the Rupee Cost Averaging will help average out your investment cost while the market fluctuates. So, when the market falls, you can buy more units at a lower price. As the market goes up, you can buy less units at a higher price. Since the investment amount remains constant, investors don’t need to worry about market fluctuations. The concept helps you see through the short-term fluctuations and lets you reap dividends over the long term.
Conclusion
So, you got to know the importance of starting early with investments. Given the inflationary world we are in, delaying investments will peg us back from achieving our financial goals. Let’s be disciplined from the beginning and continue the momentum throughout to live a life full of pleasure and comfort. And please share this advice with your family and friends for India’s inclusive growth. Together we can make the country financially strong.
Disclaimer – Mutual fund investments are subject to market risks. Please read the scheme-related documents carefully before investing.
