Gauri and Ranjana were best friends. Ranjana followed Gauri on everything. She picked similar clothes, accessories, and even the same type of investments. But, Ranjana did not benefit as much from the investments as Gauri did. So, what could be the reason for the gap? Among other things, Gauri had started investing much earlier in life. Could investing early affect your returns?
Here are five benefits of investing early.
1) Risk mitigation: You could choose an avenue for investment based on your risk appetite. But, experts suggest that volatile portfolios might produce larger gains. As a young investor, you might be less cautious. Hence, you could benefit by building a more aggressive portfolio. As the years pass by, you might choose risk-free investments. That is because there might not be enough time to recover from risk. Suppose you start investing at 40. You are close to retirement and could be left with fewer alternatives for safe investments. These would be government securities, fixed deposits, and the like. But if you start at 20, you have much more time to play around with your money.
2) Advanced learning: When you decide to invest early, one thing might lead to another. You take risks because you have time to recover from it. The more time you have, the more you could learn from your investing mistakes. This might help you improve your investing strategies. For example, if you start investing between 20 and 25 years, you could be more proficient by the time you are 30 to 35. This could make you more competitive than someone of the same age but who started later.
3) Technical advantage: Research suggests that opposed to the elderly, young minds are more tech-savvy. Your level of proficiency in technology might open gateways of knowledge on investing. You could use and re-use information available online to make successful investments. You might also profit from online trading platforms. These could provide seamless investment opportunities. Also, use of social media and trading apps could make investing seem a less strenuous job.
4) Compound interest: Do not ignore the power of compounding when it comes to investing. The longer you stay invested, better it gets. Suppose you invest Rs 1,000 at an annual interest rate of 10%. You will earn Rs 100 after the first year. However, the interest you earn the next year would be your initial investment (Rs 1,000) plus the interest you earned in the first year (Rs 100). Hence, you would earn an interest of Rs 110. So, higher investments over a longer period could make a big difference.
5) Wealth creation: Starting early could have other positive outcomes. One could be wealth creation through financial discipline and power of compounding. According to a survey, people who started investing early increased their chances of reaching financial independence at an early age. By investing early, you could also be saving more for retirement. Suppose you invest Rs 10,000 when you are 20. By the time you are 60, this could grow to Rs 70,000 at an interest rate of 5%. The same investment at a later age might give lower returns.
This might explain why Gauri beat Ranjana despite both investing the same amount in the same schemes. You could also diversify your portfolio by investing in real estate if you start early. This could give you the advantage of a monthly cash inflow and tax benefit on a property you have rented. Capital gains, dividends, and annual interests on bonds also supplement your wealth. Hence, the earlier you start, the more you might amass.