Invest early to deal better with inflation

I am 24 and want to invest in mutual funds with a small amount every month. Will I get good returns as the amount of investment is negligible?

- V Srikar, Anakapalli

Time is the best wealth creator. The earlier you start and the better and more rewarding it is. One will be shocked at how much wealth one can make, even if one can start investing a small amount each month. Hence do not delay while investing. Investing early can give you a significant advantage, essentially the benefit of the power of compounding. Compounding means reinvesting the profits from your investments to make your money grow exponentially. Compounding has a snowball effect, as you can earn interest not only on your initial investment but also on the returns or interest earned. The earlier you start, the more you can accumulate, and the better your chances of reaching your financial goals. You can begin your investment with small amounts, and as your income increases, you can raise the investment sum or instalment. Since investment tenure is longer, the investment amount can be a paltry amount.

If you are 25 and begin investing with Rs 5,000 per month, the total investment would be Rs 21 lakh when you turn 60. Assume your investment earns 10 per cent annually, and your investment of Rs 21 lakh will grow to Rs 1.91 crore by the time you are 60. The total interest earned is Rs 1.70 crore. The future value after inflation or inflation-adjusted return will be Rs 34.70 lakh if we assume the inflation rate is 5 per cent.

Suppose you started investing Rs 5,000 per month, and your age is 35. The total investment would be Rs 15 lakh during the 25 years contribution. Assume your investment earns 10 percent annually, and your investment of Rs 15 lakh would grow to Rs 66.90 lakh when you attain 60 years. The total interest earned is 51.89 lakh. The inflation-adjusted return will be 19.75 lakh if the inflation rate is 5 per cent. So, by delaying the investment by ten years, your monthly investment amount increases several times. This is how compounding makes magic.

Every incredible journey begins with a tiny step; likewise, every financial goal and aspiration will have a small beginning. Adapt the SIP route to achieve your financial goals. Nothing can be fulfilled overnight, including creating wealth and building a corpus; they require thoughtful planning, diligent decision-making, patience and perseverance. Take the first step and identify your financial plan. Then start investing and leap to achieve whatever you aspire to. You can plan your investments and give them enough time to grow into a corpus that meets your financial goals. Recurring Deposit and Systematic Investment Plan (SIP) in Mutual Funds are the two ideal options for investing a fixed amount every month.

A small but regular investment in SIP can grow into a lucrative corpus over a long-term horizon. Increasing the monthly installments of SIP over time can effortlessly boost the investment and increase the earning potential in accumulating wealth. Investing early gives you the flexibility to endure risks by investing in high-risk, high-reward financial instruments that help grow your money quicker. Long-term investment horizons cushion and absorb the effects of market fluctuations.

Even a small amount of installment can work wonders. If a 25-year-old begins a monthly investment of Rs 2,000 in a mutual funds scheme through SIP for 35 years (retirement age), the principal amount becomes Rs 8.40 lakh. If the mutual fund scheme's annual return is 15 per cent then the future value of the total investment will become Rs 2.97 crore. Investing early can increase returns and make a substantial sum in the long run.

Investing early makes you deal with inflation. Investing helps you build wealth and achieve your long-term financial goals. You will be able to create a retirement corpus, and you can plan for early retirement. Your investment corpus will generate an additional source of income like dividends, interest, and rental income apart from capital appreciation and creation of wealth. It will eventually fund long-term life goals like buying a car and paying for children's education.

Hence, investing early ensures your long-term financial security. Your family and dependents will enjoy financial stability. You can always relook and realign your portfolio according to changes in your family, financial responsibilities and life goals such as marriage, the birth of children, children's education and the construction of a house. You can also enjoy tax benefits as timely investments in instruments offering tax benefits can reduce your tax burden per the prevailing tax laws.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV)