For Sheetal, perhaps the most significant benefit of investing in her 20s is the impact that compounding will have on her portfolio. Compounding occurs when the earnings are reinvested and those earnings begin to earn more. She can invest less than what she would have to if she started investing late each month to end up with the same amount during retirement, if not more. For example, let’s say Sheetal’s goal is to have Rs 10 lakh by the age of 65. Assuming she earns an annual stock market return of 10%, if she started investing at age 25, she would only have had to contribute about Rs 200 per month to an investment account to reach her goal of Rs 10 lakh by the age of 65. If she waits until age 35, she’d have to contribute over Rs 500 per month. And if she waits until 45, she would have to invest nearly Rs 1,500 per month to achieve her goal.
Another benefit of investing in her 20s is that Sheetal will have the opportunity to make mistakes and get them out of the way while she is still young and has fewer responsibilities. Making a costly mistake with her portfolio at the age of 50 could seriously set her back on her retirement journey or a financial goal. As an investor in her 20s, Sheetal can afford to take on some higher-risk investments. Whether it be cryptocurrency or private equity or another higher-risk investment, Sheetal will have time to explore her options without hurting her future.
Another benefit of these long time horizons is that she does not need to worry about ‘timing the market’. Even if she invests when the market is at an all-time high, she can still trust that she’ll see a return. Additionally, use of digital investing tools will let Sheetal take the emotion out of investing, giving her more time to focus on her family, passions and hobbies. It will also give her more peace of mind about her finances.
Sheetal must remember that she will only experience the benefits of compounding if her investments actually perform well. She must evaluate an investment before opting for it. Young people like her have a considerable advantage when it comes to investing. By starting early, she has the potential to grow significantly more wealth, take advantage of technological innovations and take on slightly more risk.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
