Why investing early is better?

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We have often heard this and might have used “Earlier the Better” in different contexts. Does it also create some relevance in the context when it comes to “Investing”?

One of the most common and familiar words we come across from our friends and family is “Saving” that’s step 1 – what after that?

Saving can only happen once you have some kind of income, which may be called pocket money in our early college days until we start earning ourselves. Even the smallest of the component of your monthly income/pocket money every month can be put aside which is called savings and investing the same shall be the next step towards growth and savings. The little amount of money invested now will put more money in your pocket in the future.

By investing at an early stage of life, you learn a pattern of financial independence and discipline.

An early investment teaches the real difference between investment and saving. Never think young age is a barrier to making an investment, as you are never too young to invest.

Here are some reasons that suggest investment at an early age is a great idea.

  • Benefit of power of compounding
  • Time value of money (earlier the better)
  • Improves risk-taking ability
  • More recovery time
  • Improvising standard of living
  • Support retirement plans
  • Secures future

The sooner you start, makes a difference

Let’s look at an example:

(Disclaimer: 12% and10% is an assumed rate for the purpose of this example and the actual rate of return may be higher or lower than the return shown in the example)

Illustration 1:
At 16 years, Raj started saving Rs 2000 every month from his pocket money. He not only started saving but, also started investing that money in a mutual fund through SIPs. Assuming the rate of return for his investment is 12%, the tentative corpus accumulated at the end of 5 years will be Rs 1.62 Lakhs against the Invested amount of Rs 1.20 Lakhs.

Let’s say that Raj on receiving advice from a financial advisor decided to reinvest the funds, instead of spending it on a mobile or a luxury holiday, for another 5 years. Again assuming the rate of return to be 12%, the amount Raj would be accumulating at the end of 5 years will be Rs 2.85 Lakhs.

From this example, we see that at the end of 10 years Raj would have accumulated a total sum of Rs 2.85 Lakhs just through an investment of Rs 2000/- per month. (Total tenure – 10 years, assumed rate of return – 12%).

Illustration 2:
After completing his graduation, Raj gets a job that pays him Rs 30,000 per month. Out of which he decides to continue saving and investing Rs 5000 per month in mutual fund SIP for 5 years at a 12% expected rate of return.

Amount invested: Rs 3 Lakhs

Corpus accumulated: Rs 4.05 Lakhs (Tentative)

So in total Raj will be accumulating a tentative corpus of Rs 2.85 Lakhs + Rs 4.05 Lakhs = Rs 6.90 Lakhs

Cost of delay: SIP mode (assuming retirement age is 60 years)

Current Age
Amount invested (per month)
Expected Rate of return
(average per year)
Total Amount Invested
Period of Investment
(years)
Corpus Accumulated
(Tentative)
Cost of Delay
(Tentative)
25 Rs. 5,000 12% Rs. 21.00 Lakhs 35 Rs. 2.75Cr
26 Rs. 5,000 12% Rs. 20.40 Lakhs 34 Rs. 2.45 Cr Rs. 30.00 Lakhs
27 Rs. 5,000 12% Rs. 19.80 Lakhs 33 Rs. 2.18 Cr Rs. 56.90 Lakhs
30 Rs. 5,000 12% Rs. 18.00 Lakhs 30 Rs. 1.54 Cr Rs. 1.21 Crores

Cost of Delay: Lumpsum mode (assuming retirement age is 60 years)

Current Age Investment per year (Rs.) Period of Investment (years) Expected Rate of return (average per year) Corpus Accumulated Tentative (Rs.) Cost of Delay (Tentative) (Rs.)
25 1,00,000 35 10% 2.98 Crores
26 1,00,000 34 10% 2.70 Crores 28.10Lakhs
27 1,00,000 33 10% 2.44 Crores 53.65Lakhs
28 1,00,000 32 10% 2.21 Crores 76.87Lakhs
29 1,00,000 31 10% 2.00 Crores 97.98Lakhs
30 1,00,000 30 10% 1.80 Crores 1.17Crores

Do not lose the privilege by delaying investment – Hence earlier the better!

Views are personal: The author Bhavin Shah is a Mutual Fund Distributor

Disclaimer: The views expressed are of the author and are personal.TAML may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

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