Almost all of us realise the prominence of investments, yet most of us are reluctant to start early investments. But what’s the harm? Shouldn’t you be allowed to enjoy your life before you are burdened with financial responsibilities and the need to provide for your family? You definitely should. However, spending too much at a young age can cause a dent in your long-term goals.
When you start investing early, you reap the benefits of compounding, also known as the eighth wonder of the world. What is compounding you might ask. Compounding is a polynomial function with the number of years being the degree of the polynomial. Hence, the higher the number of years, more is the exponential growth of your investments.
Let’s understand this better with the help of an illustration. Aman and Vijay are brothers. Aman is 35 years old and starts a Systematic Investment Plan (SIP) of Rs 5,000 per month in an equity mutual fund, with growth option. Under the growth option, the returns are reinvested for compounding to work its magic.
Meanwhile, 40-year-old Vijay also starts the same SIP by investing in the same mutual fund as Aman at the same time. They both want to keep investing until they retire at 70 years. Let’s assume that they received an average return of 9% p.a. When they both turn70, Aman’s accumulated amount would have reached around Rs1.35 Crore, while Vijay’s amount would be around Rs 85.7 Lakh. So by starting just five years earlier, Aman will fetch around Rs 50 Lakhs more than Vijay!
This simple example shows that if you start with your investments early, invest in mutual funds regularly and avoid withdrawing from this accumulating amount, your mutual fund investments have the tendency to grow manifold. This will enable you to generate wealth and fulfil your financial goals in life like purchasing that dream house, funding for your child’s higher education, taking a world trip or even your own retirement. With different types of mutual funds available to an investor, you can choose a scheme that best suits your personal needs. You can also consult a financial advisor or an expert who can help you ride the cycles of the market.
Being young also makes you more open-minded towards your risk appetite. This is because you have fewer responsibilities and ample time on your side. This makes it easier to absorb any collapse in the value of your investments if equity markets underperform. This also teaches you a valuable lesson. This also makes you comfortable with the volatility and uncertainties of the equity markets.
Basically, investing in mutual funds early can help you to attain financial independence, aid you to fulfil your dreams, and even help you retire early if you wish. Happy investing! Now that you have understood the difference between Saving vs. Investing, invest in mutual funds online to reap the maximum benefits of compounding.