Start investing today a.ka. the power of compounding

The golden rule of investing is, the sooner you start investing the better your long term outcome is going to be.

Invest early, invest often and invest for the long term. Just be sure that you are investing money that you wouldn’t need in the short term.

Let’s look at an example.

Rani invests Rs2,500 every month in stock market through mutual funds.

Ram is always confused on where to invest. There are so many fund choices, and every expert on TV is touting a different investment as the road to riches. He does what most of us will do in a situation like this, he procrastinates his decision. As money starts piling up in his bank account he gets anxious and he invests Rs60,000 (Rs2,500*24) every 2 years in the stock market through mutual funds.

Shyam doesn’t believe in the equity market. His 2,500/ month stay in the bank and earn him nominal interest of say 6%.

They all start in 1990 and for simplicity they only buy a NIFTY mutual fund. Let’s see how they would have done in the past 25 years.

Power of compounding

Woa, big difference. Rani ends up with Rs45.6lacs (one smart girl), Ram with Rs37.4lacs (not bad for a lazy dude) and Shyam with Rs17.4lacs.

That is a huge difference over 25 years, and means a lot in the quality of life you can expect when you retire. Note that the Green line (Shyam) above is smooth, while the black (Rani) and orange (Ram) line in the chart above are all over the place. That is risk. Equity market is inherently riskier, but rewards higher returns for investors willing to bear that risk over medium to longer duration i.e over short periods you can lose a lot more in the stock market, but over the long term you will come out winning.

This is all good in theory, but what does it mean in practice:

  1. If you are not already investing, start now
  2. Create a plan and stick to it
  3. Too much choice can lead to decision making paralysis. We will cover this in more details in another post
  4. Financial TV and press are valuable resources for full time traders. If trading is not your day job, do not pay attention to them.

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12 Responses

  • M.Ramesh

    August 13, 2019 AT 09:30

    Can you help in sugessting me a good retirement plan and your views on Tata digital,Mirrae Asset blue chip fund &DSP Midcapfund as i have SIP Inthese funds ,do i need to change