People tend to postpone their investment decisions from one day to the next, believing that it makes little difference. They tend to forget that time is money. In fact, time creates money. They do not really understand the power of compounding until they experience it, at which point it is too late to recover the lost time.
You must have heard the infamous words of wisdom by Sant Kabir – काल करे सो आज कर, आज करै सो अब |
This phrase fits perfectly when it comes to investments, as delaying costs a lot. People think that a few years of delay in their SIP will not make any big difference & they can catch up later by investing more with better earnings. It is a myth! The truth is you’ll lose out on compounding gains for that skipped period. Moreover, the cost of delayed investment increases with an increase in delay. Also, one has to invest a much higher amount to get the same level of returns if they had started earlier.
What is the cost of delayed investment?
Let’s understand this with an example:
Abhishek is 30 years old and he has decided to plan for his retirement at the age of 60 years. He has 30 years of time and he plans to invest monthly Rs. 5000 in mutual funds. Assume return on investment is 10% (10% return is taken based on average return on an equity-linked fund, generated over the past 2 decades). Abhishek has three options to start with his investment as shown in the table below:
From the above table, we can see that if Abhishek delays his SIP by 5 years he losses on compounding gains worth Rs. 47 Lakhs & if he invests 10 years later his cost of delayed investment is a whopping Rs. 75 lakhs!.
Let’s take another example of delaying investments but investing larger sums:
From the above table, we can see that if Abhishek delays his SIP by 5 years but invests more each month he still losses by Rs. 20 Lakhs & if the delay is by 10 years, despite investing double the amount each month the losses mount to Rs. 37 lakhs.
Both the options mentioned above point toward one thing the cost of delayed investment increases with an increase in delay. Abhishek would not have needed to earn exuberant rates of return if he had started earlier. When investments are made early, they have a longer time to grow and small amounts can generate huge returns through the power of compounding.
So what is this magic of compounding?
Why one should start investing early? The answer is compounding!
Compounding means earning interest on interest. It is the process by which interest is credited to an existing principal amount and also to interest already paid. Hence,. It helps to supercharge your savings.
As a wise man once said, “Money makes money. And the money that money makes, makes more money.”
Hence, the sooner you start investing money for your financial goals, the better returns you’ll get.
Things to take care of-
- Start ASAP!
Start with a SIP as soon as you get your first paycheck. Start irrespective of the amount. As we saw above that a small amount invested for a longer time gives higher returns than a large amount invested later.
2.Start with a SIP
Systematic Investment Plans make your investment journey more disciplined. It helps you to automate your investments so you never miss or delay them. It helps you to ride out the highs & lows of the market.
3.Portfolio check
Long-term investing does not mean investing & forgetting. On the other hand, churning your portfolio frequently is also not good. You should go for a periodic review of your portfolio; it’s best to undertake a quarterly or semi-annual review to guarantee proper asset allocation across various asset classes. When your portfolio deviates from your target allocations, rebalancing is a must.
CONCLUSION
Do not wait for the “right time” to start your investments. Volatility is an inherent nature of the markets and has always remained so. The power of compounding helps us ride this volatility by averaging out the highs and lows of the market. It is important to remember that time in the market is more important than timing the market to generate long-term wealth. Hence, start early and stay disciplined. Are you ready to invest right now but confused about where should you start, don’t worry! Consult a SEBI Registered Investment Advisor and kickstart your investment journey now!