Most successful people across the world are people who started early in life. Be it in their professional careers or financial investments. Reaching heights and transgressing all obstructions is not so easy. Step by step have successful people achieved what they now possess - respect, wealth and power. It is not a matter of a few days or months, but years and even decades of hard work and devotion.
An ideal age to start investing would be as soon as one is independent and is earning a regular income. In the Indian context this would usually be in the range of 24-27 years of age.
Why start early?
To begin with the benefits of starting to invest early in life, early age is more impressionable, since what you learn stays with you throughout life. Experience will give you an idea of how to manage ups and downs, not only in investments, but also in other spheres of life.
When you begin early in life, you have a lot of time to learn and organize your ideas, to try out various ideas through implications. One of the biggest advantages of starting early is that it teaches one to be disciplined in their investment approach. One learns to manage his/her expenditure and savings in a more prudent manner.
The other advantage of staring to invest early is the power of compounding. This is a concept which explains why the returns from an investment in 20 years is much more than double the returns from a similar investment in 10 years. Compounding has been explained in detail in a later section.
Where should I Invest?
What kind of investments one undertakes depends purely on the profile of an individual investor. In case you are someone who is willing to take high risks early in life and have enough time and expertise to study individual company financials and business, you could try investing directly in the stock market. However, if one has a career in a different stream and cannot dedicate enough time to his investments, then mutual funds are considered as one of the best options for long term investments. Depending on your risk appetite, one may choose from equity or debt funds. In case one is looking for very safe investments, there is also the option of investing in fixed deposits or government bonds. However, when one is starting early these would not be recommended as the returns from them are much lesser than from the earlier mentioned instruments.
What is compounding?
Let’s get you introduced to compounding now. When the topic of investment arises, one cannot ignore the power of compounding. It is a concept which allows one to increase their returns exponentially by letting the investments ride for longer durations. Let’s try and understand how this works. Let’s assume you invest a sum of Rs. 1,000 in an instrument that returns 10% annually. If you are to withdraw this sum at the end of a year, the total sum available for withdrawal is Rs. 1,100, i.e. a gain of Rs. 100. However, if you are to invest this amount for 2 years, the gain is not 2 times 100 (or Rs. 200) but it is Rs.1,210, as in the second year you will also earn 10% on the additional Rs. 100 of interest earned in the first year. The excess of Rs. 10 may seem quite small. However, if we are to extrapolate this to a bigger initial investment and a longer time horizon the results can be astonishing. An investment of Rs. 10 lakhs today if invested for 20 years at 10% will return a staggering Rs. 67,27,500 (a gain of over Rs. 57 lakhs). This gain would have been only Rs. 20 lakhs if you were to withdraw the 10% return every year.
As is evident from this article, the benefits of starting early and staying invested are huge. Firstly, a person can take the higher expected return investment bets as you have time on your side. More importantly, by staying invested and earning returns on returns through compounding can increase one’s wealth multifold over longer periods.
The range of investment options available for investors are broad. However, one must wisely select the appropriate avenue for investment for themselves. It always makes sense to consult a financial advisor for guidance.