The Importance Of Starting Investing Early

In today's world, we are all about living in the moment. Fancy gadgets, designer clothes, and Insta-worthy vacations. It is all about enjoying now. But what about your future? Investing early is crucial. The earlier you start, the better. Time is your best friend when it comes to building wealth.

Let us say you are young, just starting your career, with limited money to spare. You might wonder, "What is the point of investing if I can barely afford my daily coffee?" But hold on! Even small amounts can blossom into a substantial fortune over time, thanks to the magic of early investing.

Let us understand it with an example:

Take Sara, who starts investing INR 3,000 monthly at age 25, which would be INR 100 every day (less than the price of a cup of coffee). She continues for just 10 years, then stops adding new money but lets her investment grow. By the time she is 65, her investment will grow to approximately INR 1.2 crore, assuming a 10% annual return. This shows how powerful compounding is when given time.

Now consider Daisy. She starts at 35, investing the same INR 3,000 monthly. She continues for 30 years until retirement. Despite investing for a longer period, she ends up with only around INR 67.8 lakh. This stark difference highlights the benefit of starting early. Sara's initial 10-year investment beat Daisy's 30-year effort because she gave her money more time to grow. Investing early is crucial for building long-term wealth.

In this blog, we will explore the power of compound interest and how it can benefit you over time. We will also delve into the advantages of starting early and the impact of delayed investment decisions. Also, the best investment avenues for newbie investors are covered in this blog further.

Small Steps, Big Results: Why Starting Early Matters

Many people believe you need a hefty sum to start investing. Not true! You can start with small, regular investments and gradually increase them as your income grows. Here is why getting started early, even with a modest amount, is a game-changer:

The Compounding Effect: This is often referred to as "interest on interest." Basically, your investment returns generate even more returns! Let us say you invest INR 1,000 per month with a 12% annual return. In the first year, you earn INR 120 in interest. But in the second year, you not only earn interest on your initial INR 1,000 but also on the INR 120 you earned earlier. This snowball effect keeps growing exponentially, significantly boosting your wealth over time.

Time is Your Ally: The earlier you invest, the more time your money has to grow through compounding. You will witness the miracle of compounding over longer periods. 

Building a Habit: Starting small and investing regularly helps you develop a healthy financial habit. With a minimum of INR 500 in mutual funds and INR 1,000 in fixed income, you can start investing early and grow your wealth. So do not wait as your income grows, you can gradually increase your investment amount, accelerating your wealth accumulation journey.

The Cost Of Delay: Why Starting Early Saves You

Let's see how delaying your investment journey impacts the amount you need to save each month to reach your retirement goals. We will assume a constant 12% average annual return in all scenarios.

Target Retirement Corpus: INR 1 Crore

The table shows how delaying investments significantly increases the monthly amount you need to save to reach your retirement goal. This happens because of two reasons:

1. Missed out on Compounding: When you start early, your money has more time to grow through compound interest. Delaying investments means missing out on this crucial growth period.

2. Shorter Timeframe: With less time remaining, you need to contribute a larger amount each month to reach your target corpus.

Starting early, even with smaller amounts, allows you to leverage compound interest and reach your goals comfortably. The longer you wait, the steeper the monthly investment climb becomes.

Starting early makes a big difference in investing. Even small savings add up over time. Let us understand this with a practical example.

Let us say you are new to investing and do not know much about markets and you invest in a vanilla index fund. An index fund is a low-cost investment that mimics the performance of a stock market index. You start a monthly investment of INR 10,000 in the HDFC Index Fund - Direct Plan - Nifty 50 Plan, which tracks a stock market index.

If you began in 2019 (5 years ago), you would have invested a total of INR 600,000. Today, that investment could be worth INR 944,954. That is a profit of INR 344,954, or 57.5%! The average annual return for this period was 18.2%.

Now, let us see what happens if you started 5 years earlier, in 2014. With the same monthly investment, your total contribution would be INR 1,200,000. Today, your investment could be worth a whopping INR 2,620,016! That is a profit of INR 1,410,016, or a huge 116.5% gain. Your profits would be more than your investment amount. Even though the average annual return was slightly lower at 14.6%, the extra time in the market significantly boosted your earnings.

This shows the power of starting early. Even small amounts can grow into a large sum over time thanks to compounding interest. 

Advantages Of Starting Early

While higher returns are certainly attractive, there's a whole lot more to gain by starting to invest early on. Let's break down the key advantages of getting your investment journey started sooner rather than later.

1. Leveraging Your Risk Tolerance

Starting out young gives you a leg up in investing! You have time on your side, which means you can take on a bit more risk. This opens the door to growth-oriented investments like stocks and stock mutual funds. These can be more volatile, meaning their prices swing up and down more, but the potential for higher returns is there. The key thing to remember is you have time to weather those ups and downs and see your money grow in the long run.

2. Riding The Market Volatility

Young investors possess a distinct advantage: a long investment horizon. This allows you to prioritize growth-oriented assets, like stocks, within your investment strategy. While these assets offer the potential for higher returns, they also experience short-term price fluctuations or volatility.

However, a long-term perspective reduces this concern. Historical data shows that volatility's impact diminishes over extended periods. For instance, if you look at the chart of NIFTY 50 of the last 6 months it exhibits volatility, however, when you zoom out the volatility smoothens out.

Evidence supports this claim: The Sensex rarely experienced yearly corrections exceeding 10%. In fact, this only happened four times between 1980 and 2023. Intra-year declines of 10-20% are more common, with even substantial corrections like those in 2008 (60%) and 2020 (38%). Despite these drops, the index delivered positive annual returns in most years. Notably, the Sensex TRI achieved a strong 14.6% annualised return over the past decade (ending February 29, 2024).

History shows us that despite periods of volatility, the stock market tends to trend upward over the long term. By starting early and staying invested for the long haul, you can benefit from this overall growth trajectory. Even if you experience short-term losses, you have time for the market to recover and your investments to potentially reach their full potential.

3. Peace Of Mind For Uncertain Times

Life throws curveballs sometimes. Maybe it is an unexpected medical bill or a temporary job loss. But by investing early and consistently, you can build a financial safety net. This emergency fund can act as a buffer during tough times, giving you peace of mind and the freedom to weather any financial storms that may come your way.

Investment Options For Early Investors

As a new investor, you have a variety of options to choose from. Here are some popular choices:

1. Stocks: Represent ownership in a company and offer potentially high returns but come with higher risk.

2. Mutual Funds: Pool money from many investors to buy a diversified portfolio of stocks, bonds, and other assets. This reduces risk compared to individual stocks.

3. Exchange-Traded Funds (ETFs): Similar to mutual funds but trade on stock exchanges like individual stocks. They offer low fees and a diversified way to invest in different sectors or markets.

4. Fixed Income Instruments: These provide steady returns with lower risk. Examples include:

• Bonds: Loans you make to governments or companies, earning interest payments over time. They offer predictable returns but may have lower growth potential than stocks.
• Fixed Deposits (FDs): Secure deposits with banks for a fixed term, offering guaranteed returns. Ideal for short-term goals or building an emergency fund.

5. Real Estate And Other Alternative Investments: While stocks, mutual funds, and ETFs are popular options, young investors can also consider alternative investments to diversify their portfolios further. Here are a few examples:

• Real Estate: Investing in rental properties can generate passive income and potential long-term appreciation. However, real estate requires significant upfront capital and ongoing management responsibilities.
• Commercial Real Estate via Co-ownership: For those interested in real estate but lacking a large sum for a whole property, consider co-owning a piece of commercial real estate. This approach allows you to collectively own Grade A commercial properties, like warehouses and offices in prime locations, alongside other investors.
• Peer-to-Peer Lending: This involves lending money directly to individuals or businesses through online platforms. It can offer attractive returns but also carries the risk of borrower default.
• Commodities: Investing in commodities like gold, oil, or agricultural products can provide a hedge against inflation. However, commodity prices can be volatile.
• Securitised Debt Instruments (SDIs) : SEBI and RBI regulated fixed income opportunities offering better risk-adjusted returns than traditional investments. These investment options are rated by independent credit rating agencies and come with a security package.    

Remember, the best investment choice depends on your individual goals and risk tolerance. Consider consulting a financial advisor for personalised guidance.

Strategies For Early Investing

Here are some key steps to set yourself up for successful early investing:

• Define Your Goals: Are you saving for a house, retirement, or a child's education? Knowing your goals will help you choose the right investments and time horizon.
• Develop a Budget: Determine how much you can realistically invest regularly. Start small and increase your contributions as your income grows.
• Choose Your Investments: Research different investment options and select those that align with your risk tolerance and goals.
• Automate Your Investments: Set up automatic transfers to your investment accounts to ensure consistent contributions.
• Review and Rebalance Regularly: Monitor your portfolio performance and adjust your asset allocation as needed to maintain your desired risk profile.

Challenges And Considerations

Starting early does not eliminate all investment challenges. Here are some factors to be aware of:

1. Market Volatility: The stock market experiences ups and downs. Do not panic sell during downturns. Stay invested for the long term to benefit from market recovery.

2. Inflation: Inflation erodes the purchasing power of your money over time. Choose investments that have the potential to outpace inflation. You can consider investing in investment-grade corporate bonds to earn inflation-beating returns. 

Strategies For Mitigating Challenges:

1. Diversification: Spread your investments across different asset classes to reduce risk from any single asset performing poorly.

2. Stay Invested for the Long Term: Do not make investment decisions based on short-term market fluctuations. Focus on your long-term goals and maintain a disciplined investment strategy.

Conclusion

Don't wait to build your wealth! Starting to invest early is a powerful financial move. The magic of compound interest, paired with time on your side, can supercharge your savings. Even small contributions add up over the years, bringing you closer to your financial dreams. The key? Get started now and diversify your investments. Platforms like Grip Invest, a leader in high-yield investment opportunities, can be a helpful starting point.

Frequently Asked Questions On Early Investing

1. What Type of Investment Has the Highest Long-Term Growth?
Stocks typically offer the highest long-term growth. They are volatile but tend to perform well over time. For instance, the average annual return of the S&P 500 over the last 90 years is around 10%.

2. What Does the Rule of 72 Tell You?
The rule of 72 is a simple way to estimate how long an investment will take to double at a fixed annual rate of interest. Divide 72 by the annual interest rate. For example, if your investment earns 6% per year, it will double in about 12 years (72/6 = 12).

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