You know that equities outperform over the longer term. That means only if you hold it for 10-15 years. Why is that so? The longer you stay invested, the more your investment earns and therefore the more your returns earn further returns. In technical parlance, this is called the power of compounding. For example, if Rs.100 earns 15% each year, then in the first year Rs.100 earns 15% but in the second year Rs.115 earns 15% and in the third year Rs.132.25 earns 15%. This compounding goes on year after year and that is why the longer you stay invested, the more you earn. Let us look at this issue in another way! If you need to stay invested for a longer period of time then you need to have more time at your disposal and that means you need to start early.

To understand the need to start investing early, let us take the case of an investor, Manish Patel, who plans to retire at the age of 55 years! He is currently 45 years old. He decides to start a Systematic Investment Plan (SIP) by investing Rs.10,000 each month in an Equity Mutual Fund. He expects to earn 15% annualized returns on this equity mutual fund.

Time to start total years of Investment available how much he would have invested how much returns he earns how much his corpus will be worth

If Manish starts today 10 12,00,000 15,86,572 27,86,572

If Manish had started 10 years ago 20 24,00,000 1,27,59,549 1,51,59,549

If Manish had started 20 years ago 30 36,00,000 6,64,98,206 7,00,98,206

The above table clearly illustrates the importance of starting early. If Manish starts his Rs.10,000 SIP today he will have to invest a total of Rs.12 lakhs and it will grow to just Rs.27.86 lakhs by the time he retires at the age of 55. The wealth creation ratio is just 2.32 times. Had he started this SIP 10 years ago his wealth creation ratio would have been 6.32 times? But, if Manish had started his SIP 20 years ago, then his wealth creation would have been a whopping 19.47 times. That is a classic example of money working for you and that is why it is essential to start investing early.

Dia Deshpandeanswered.