As youngsters have long earning periods and ample time to stay invested, they can easily withstand market risks and invest in equities to earn superior returns by starting their investment journey early.
In fact, youngsters are now investing in equities and equity-oriented mutual fund (MF) schemes as the advancement in technology has made the investment process easy.
Starting early is very important to enjoy the power of compounding, as time is the most important component of the compound interest formula.
For example, Amit starts investing at the age of 20 years and invests Rs 10,000 per month through a Systematic Investment Plan (SIP) in an equity-oriented MF scheme for 40 years. On the other hand, Sumit starts investing through SIP late at the age of 40 years and invests Rs 20,000 per month in the same MF scheme in order to compensate for the loss of time. The investment amount for both of them will be Rs 48 lakh.
However, at a Compound Annual Growth Rate (CAGR) of 12 per cent over the investment period, at the end of the respective investment periods, the total fund value of Amit will be over Rs 9.79 crore, while that of Sumit will be around Rs 1.84 crore.
So, by starting early, Amit would earn around Rs 8 crore more than Sumit despite investing the same amount of Rs 48 lakh each.
In case, the CAGR moves up at 15 per cent, the return for Amit will be over Rs 23 crore and for Sumit, the return will be over Rs 2.65 crore. In this case the Amit will earn over Rs 20 crore more than Sumit against the same total investment of Rs 48 lakh.
So, despite having the same total investment amount and same CAGR, only the time difference makes a huge difference in returns.
In fact Albert Einstein once described compound interest as the “eighth wonder of the world.”
Now take another example of Rakesh and Mukesh, who are 20 years old and are risk-averse investors. So, instead of investing in equities, they decide to invest periodically either in Fixed Deposit (FD) through a Systematic Deposit Plan (SDP) or through Recurring Deposit (RD). Rakesh starts investing Rs 10,000 straightway, while Mukesh starts investing Rs 20,000 per month 20 years later.
With a consistent compounding rate of interest of 7 per cent throughout the investment period, at the age of 60 years, Rakesh gets total maturity value of around Rs 2.49 crore after the 40-year investment period, while Mukesh gets little over Rs 1.02 crore after his investment tenure of 20 years.
So, Rakesh earns about Rs 1.47 crore more than Mukesh despite having the same total investment amount of Rs 48 lakh.
So, even in conservative investments – without taking income tax effect into consideration – time plays a pivotal role in generating much superior return.
Though starting an investment journey early is important, it’s not the only factor to reach the goal successfully. An investor needs to stay invested for long, which may be possible only if the investor enters – especially the equity market – with a clear financial goal.