Your 20s are the time when you learn the concept of importance of investing and creating a financial plan. Though it might sound daunting, investing can be a good opportunity to create a substantial corpus for your future. Having a basic understanding of the markets and learning how to manage your investments is a good place to start. If you are new to the world of investing, we would recommend investing in mutual funds as it provides you with professional management from fund managers. Often investors think that they need to start investing in mutual funds in their late 20s. However, they could not be wrong. This article will explain the benefits of starting young. Read on to know more
5 reasons why you must invest young to achieve a healthy corpus
Following are 5 reasons why you must consider to invest in mutual funds from a young age:
- Power of compounding
The power of compounding works best when you are invested for the long run. Compounding follows the concept of earning returns from existing returns. As the holding period of lumpsum investment is greater than that of SIP investments (as the investment amount under SIP is divided into small, insignificant amount) the return ratio of lumpsum is usually higher than that of SIP thanks to the power of compounding. So, the longer the holding period, the greater the benefits of compounding.
- Capital appreciation
When you invest in mutual funds from an early age, you provide your investments the much-needed time to grow to their full potential and turn into a significant corpus upon maturity. What’s more when you invest for a prolonged duration, the market cycles smoothen over time. This helps to overcome the short-term volatility associated with stock markets and earn substantial returns on your investments.
- Financial discipline
Inculcating the habit of investing from an early age is the perfect to become responsible about your finances. To begin your investment journey, you must draft a clear, well-defined financial plan that suits your investment portfolio. You can begin by investing in SIP (systematic investment plan) that allows you to invest small, insignificant amount of money at regular intervals. SIP investments help to inculcate financial and investment discipline among investors.
- Improves risk tolerance of an investor
When you are young, you can stomach the volatility lashed out by mutual fund investments as you do not have much responsibilities and a family to tend to. This allows you to be more aggressive with your mutual funds than if you had invested at a later stage. Being aggressive at the young age can be good for your portfolio as it can help you earn substantial returns.
- CAGR (Compounded Annual Growth Rate)
When you invest at a young age, you have a longer investment duration which allows fund managers to attain steady CAGR performance for investors. Even in practical situations, the returns earned are more significant as the holding period increases.
Note that a tipping point happens nearly after every fifteen years, prior to which wealth generation becomes much more quick. So, what are you waiting for? Do not wait for the next big income flux to invest in mutual funds. You can start small today by investing in mutual funds via SIP and gradually increasing this amount as your income grows. Happy investing!