Almost all of us realise the importance of investing and financial planning, yet the majority of us are reluctant to begin early investments in investment havens. But is it that bad? Shouldn’t you be permitted to enjoy your life before you’re burdened with financial responsibilities and the need to provide for your family? Yes, you definitely should. However, reckless spending at a young age has the potential to cause a dent in your goals.
When you invest early, you reap the benefits of compounding, also known as the eighth wonder of the world. If you are wondering what exactly compounding is, it 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 one’s investments.
Being young also makes you more open-minded towards your risk profile. This is because you are endowed with fewer responsibilities and ample time on your side. So, you can easily invest in equity markets as you have the time horizon to smoothen the volatility in your mutual fund invesments.
5 reasons why investing early helps you accumulate a significant corpus
Following are some of the reasons why you should invest early:
- When your money is invested for a long period of time, the cycles in the business and the market tend to smoothen over with time. This helps to overcome the short-term volatility associated with investments in the stock market over the long run and helps to smoothen returns.
- The power of compounding worksbest when you are invested for the long run. For a matter of fact, the return ratio due to compounding is higher in case of a lumpsum investment as compared to SIP investments, as the holding period in the former is greater than the later.
- The longer tenure permits fund managers to express steady CAGR (Compound Annual Growth Rate) performance to investors and even in practical scenarios, this results in better returns as the holding period goes longer.
- Remember, that when you are invested in a growth plan for a long duration, the principal and the intermediate results are reinvested. The longer the holding period, more is the effect seen.
- There is a tipping point that happens nearly 15 years. After this point, wealth accumulation becomes much more rapid. This is when the power of compounding works in favour of the investor.
Basically, when you invest from an early age, you might attain financial independence. It also aids you to fulfil your dreams, and even help you retire early. Now that you have understood the importance of investing invest early to reap the maximum benefits of compounding. Remember, as an investor, you are literally flooded with several types of investments. Different types of investments such as mutual funds, stocks, gold ETFs, etc. cater to the varying needs of investors. Understand them and invest accordingly. Happy investing!