SINGLE

Start early
Starting off early helps
you erase the mistakes
and lets you to benefit
from the long-term
returns of equity

he early bird gets the worm, and in finance,

an early start can help you realise all your
financial dreams. Typically, in the first phase of
your career, you have the envious position of
being single and most often only yourself to fend
for. At the same time, having control over your
finances by yourself comes with its share of
responsibilities and competing priorities. For
instance, you may wish to spend on the new smart
phone or look at sprucing up your place with the

8 Mutual Fund Insight November 2014

latest LED television. Yet, the advantages of saving

and investing for the future while balancing your
other goals, cannot be overstated.
As with anything in life; there are immense
benefits of starting early with investments in life.
The earlier you begin planning for your financial
goals, the greater your potential return on
investment (See: Cost of delay). By taking
advantage of your youth, you can get a head start
on saving for your future. What more, if done

smartly, a few sacrifices in early years can actually

allow you to take it easy a few years later.
Typically, when it comes to investing, equity as
an asset class is most appropriate for the long run.
Yes, compared to fixed return instruments,
investing in equity is risky, but in the long run, it
is the only asset class that beats inflation and has
the necessary potential to help your financial
goals come true. Moreover, you benefit from the
advantages of compounding, which is basically
the interest earned on interest.
Investing early allows you to develop
disciplined spending habits by focusing on your
budget and cutting expenses when needed. The
goal here is to earn money by investing it.
Moreover, this habit will see you through tough
times later in life when you have additional
financial responsibilities which can result in
unstable income or savings.
COMPOUNDING EFFECT

Albert Einstein famously described compound

interest as the 8th wonder of the world. A
profound statement, considering it was coming
from one of the greatest minds of all-time. To put
it simply, compound interest is the earnings on
investments and the re-invested earnings. So, as
the capital sum invested grows so do the
earnings on the capital until a snowball effect
starts to take shape. Just the way a snowball rolls
it accumulates more and more snow, in case of
compounding; the value of your investment
starts to shoot up.
To illustrate the same, what do you think will
grow more10 per cent a year for 15 years, or 33
per cent a year for 5 years? The answer is that
the two will earn the same amount, about 4.18
times. The biggest thing that investors should
appreciate about compounding is the enormous
value of time. As your returns themselves start
earning, and then the returns on those returns
themselves start earning, the profit starts piling
up at an enormous pace ( See graph:
Compounding effect).
The graph illustrates the example of how the
blue line stars rising slowly and with
compounding coming into play and charts its

COST OF DELAY
Age
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

Kamal (`)

30000
30000
30000
30000
30000
30000
30000
30000
30000
30000

Interest at 12% pa

33,600
71,232
113,380
160,585
213,456
272,670
338,991
413,270
496,462
589,637
660,394
739,641
828,398
927,806
1,039,143
1,163,840
1,303,501
1,459,921
1,635,111
1,831,325
2,051,084
2,297,214
2,572,879
2,881,625
3,227,420
3,614,710
4,048,475
4,534,292
5,078,407
5,687,816
6,370,354
7,134,797
7,990,972
8,949,889
10,023,875
11,226,741

1.12 crore

Neelkamal (`)

30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000
30000

33,600
71,232
113,380
160,585
213,456
272,670
338,991
413,270
496,462
589,637
693,994
810,873
941,778
1,088,391
1,252,598
1,436,510
1,642,491
1,873,190
2,131,573
2,420,962
2,745,078
3,108,087
3,514,657
3,970,016
4,480,018
5,051,220
5,690,967
6,407,483
7,209,981
8,108,778

81 lakh

own course which far outpaces the regular

investment. The impact of compounding works
wonderfully over the long term Translated into a
human lifetime, it means that starting to save at
the age of 35 instead of 50 can mean retiring with
four times the wealth. The graph shows this
clearly. If one has time to learn just one thing
about investing, then it should be this.
Mutual Fund Insight November 2014 9

from their mutual fund investments.

Firstly, since SIPs mean investing with a fixed
sum regularly regardless of the NAV or market
level, investors automatically buy more units when
the markets are low. The arithmetic is simple.
Suppose you are investing `10,000. In a month
when the NAV is 20, you will get allotted 500 units
(10000/20). However, in a month when the NAV is
16, you will get allotted 625 units (10000/16).
Thus you have automatically bought more
units when the markets are lower. When the time
comes to redeem your investments, all the units
are worth the same. However, your profit margin
is higher for units that were bought at a lower
price. Effectively, you have paid a lower average
price, which translates to higher returns. One of
the basic principles of investing is Buy Low, Sell
High. SIPs automatically enforce this.
If you invest a large sum at one go, you could
end up catching a high point of the equity
markets. This would mean that you have invested
at a high NAV and that would reduce your gains if
the market falls. An SIP is a good way to invest at
an average price over a period.
Secondly, SIPs are also a great psychological
help while investing. Investors inevitably try to
time the market. When the market falls, they sell
and they dont invest any more. When it rises,
they invest more. This is the opposite of what
should be done. An SIP puts an end to all this by
automating the process of investing regularly. It
eliminates the mental load of deciding when to
invest and leads to better returns.
Systematic investments help inexperienced
investors in getting good returns. Following this,
they buy low and stand in good stead eventually.

COMPOUNDING EFFECT
`5.9 lakhs

`6 lakhs
`5 lakhs
`4 lakhs
`3 lakhs
`2 lakhs

`3

`1 lakh

lakhs

0
1 yr

10 yr

THE WAY OUT

The instrument that can help you best to make the

most of starting early is mutual fund, especially
the systematic investment (SIP). By investing
systematically, you not only invest regularly, you
also ride a full investment cycle, averaging out
your investments over the long run and building
wealth for you in return.
Investing regularly means lower risks and
higher gains. Systematic investments plans
make this simple and easy. Apart from
straightforward investment and redemption in
funds, there are some special systematic ways
of investing and redeeming your money in
mutual funds. They are enormously useful in
making you a more disciplined investor, as well
as enhancing your returns.
In mutual funds, an SIP is a regular
investment of a fixed amount at a fixed
frequency. Generally, the frequency is monthly,
but can also be weekly or quarterly. SIPs neatly
solve the two main problems that prevent
investors from getting the best possible returns

START INVESTING
EARLY

When you start saving early, your

money has more time to grow.
Moreover, you benefit from the power
of compounding - your investment
earns income and that income earns
more income. So, the sooner you start,
the better your chance at building
wealth in the long-term.
10 Mutual Fund Insight November 2014

Daughters Education

Daughters Marriage

2012-2016

2015

Sons Education

Buying a Home

`75 lakh

Retirement

`1 crore

2016-2020

2020

2025

Goals
`12 lakh

`8 lakh

`25 lakh