When is the right age to start investing? It is never late or early to start investing. Investing at an early age is a welcome habit, it instils financial discipline and provides an opportunity for generating another source of income at an early age. It gives young investors ample time to learn about the market, build wealth and meet their financial goals. Early investment planning also gives you a chance to take the risk, make mistakes and learn. This helps in developing financial discipline, an essential skill required for maintaining a healthy financial position. Cash crunch, inadequate capital and large debts are realties for those who don’t plan their investments. Investments provide a cushion and absorb the shock emanating from adverse situations While making investment decisions at the start of your career, it is important to focus on your goals and build a portfolio while keeping in mind your earnings. It is equally important to know the returns and risk on capital before investing. The early bird catches the worm, this is true in the context of early investment planning.
Compounding: The Eighth Wonder?
One of the best concepts to know while investing is the compounding effect on your investments. People who don’t know the power of compounding often run astray in the process of creating wealth. Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” It is an effective tool against inflation. Inflation reduces your purchasing power. Let us assume that the inflation rate is 4%, the 100 rupees today is worth Rs. 96 a year later. If you start investing at an early age, with compounding, assuming the rate of interest is 8%, 100 rupees invested today is 108 rupees a year later and 215.89 rupees 10 years later. Interest is added to the principal so interest is earned from the added interest. Compounding helps increase investment profits. To be financially independent, one must start investing early and use the power of compounding to an advantage. Early investing allows you to take risks whereas at a later stage in life one would want regular income and low-risk exposure.
Where to invest? How to manage the risks?
There are different asset classes, each catering to the different needs of the investors. One must evaluate and invest based on his/her needs and goals. An investor can choose from various asset classes like physical assets like land and gold, Mutual Fund Schemed, Bonds etc. Physical assets like land and gold carry relatively less risk and are suitable for investors looking to avoid risk. Recurring deposits and Bank Deposits can be done by income-focused investors who are risk-averse. Yet, it is always advisable to invest a portion of wealth in lowrisk assets.
For young investors, it is best to allocate more to equity and less to assets like land and gold. In general, the main goal when investing early is wealth creation and accumulation, investing a larger portion in equity helps in generating returns and capital appreciation. Whereas when planning retirement, investing in bonds and government securities provides you with regular cash flow. It is very important to know your goals before investing. Young investors can start with SIPs (Systematic Investment Plans), investing at regular intervals. The risk exposure is less when it comes to SIP. There are various other opportunities available in the market that are less volatile and lucrative options for young investors to start investing. So, take advantage of the opportunities available to you and catch the bull by its horn to reap benefits.
Investing your funds is a great way of creating wealth but it doesn’t come without risk. Early investing can lead to better risk management. Young investors start learning about the opportunities in the market and the risks involved at an early age. But regardless of age, one should not invest without proper research as even the safest investments carry some risk. Managing your risk and hedging is a skill one needs to learn.
Conclusion:
Early investing is a good decision. As a beginner and a working professional, investing early will help you in achieving your future goals. Start small now and see your wealth grow. Keeping this in mind, take stock of your current situation and start investment planning if you have not started yet.
