As the saying goes, the early bird catches the worm. Similarly, investing in mutual funds earlier are likely to bring in success. Since good habits are meant to be learnt in the early stages of life, making savings early in life could go a long way in shaping your future. You should know the difference between saving vs investing to earn the most on your mutual fund investments.
Starting early with your investments in mutual funds will help you reap benefits from the power of compounding in the long run. So, if you start planning for your retirement kitty when you turn 40, you’re likely to save much less than what you would have received had you begin at 25 years. You can earn an advantage through most ups and downs of the stock market over a long period.
How does compounding work?
When you stay invested for a long duration, you are benefitted from the power of compounding, also known as the eighth wonder of the world. Compounding enables to accumulate a higher corpus over time. Compounding ensures that your returns on your mutual fund investments further accumulates more returns. Hence, to be fully benefitted from the compounding effect, it is always advised to invest at an early age.
Let’s understand the power of compounding with the help of an example. Rita invests Rs2000 each month in a SIP (Systematic Investment Plan) from the age of 25. SIP is a way to invest in mutual funds. Neeta, on the other hand, invests Rs5000 in the same SIP from the age of 35. When they both turn 45, assuming that they both earned similar annual returns at the rate of 12% p.a., Rita’s kitty would have grown to Rs20 lakhs. While Neeta would only have earned Rs.9.3 lakhs – less than half of what Rita earned. Although Neeta has invested a higher amount that Rita, but her funds didn’t get the ample time required to grow into a considerable corpus.
You can also consider increasing your SIP investment amount with time as your income grows. This is known as Step-up SIP. Each time you earn a raise, dedicate a part of your salary to your retirement corpus as well. This will help you to retire early and also ensure securing your future. Remember, thanks to the power of compounding a mere addition of 5% increase in SIP each year can work wonders on your investments.
Returns are just one side of the coin. The other side is inflation. Inflation ensures that the value of your money drops every year and this too compounds. In order to maintain your lifestyle post-retirement, it is imperious not only for you to begin investing early, but to remain invested for as long as you can and keep increasing your SIP contribution via bonus bump ups as and when your salary increases.
Remember, as an investor, you are flooded with different types of investments. Different types of mutual funds caters to the varying needs of investors. Understand them and invest in mutual funds online at the earliest. Happy investing!