Starting your SIPs early can help you achieve your goals and build wealth with relatively low monthly contributions
28-Feb-2020 •Research Desk
According to a popular saying, being early to bed and rise makes one healthy, wealthy and wise. But it's not just waking up early that's good; in many aspects, being early has its own advantages. For instance, if you have to take a flight, you should start earlier than necessary. If you do, you won't have to rush, curse the traffic every time your car slows down, or stand in a long queue at the baggage counter. By being early, you can relax, enjoy a cup of tea and snacks at the lounge, and take a stroll at the airport. Starting early is often the key to peace of mind.
Why should it be any different for Systematic Investment Plans (SIPs)? Starting your SIPs early comes with a lot of advantages. The most obvious is that you have a longer time to save and invest for your goals. This means that if you start early, you can accomplish the same goals with much smaller amounts. How? We shall see an illustration soon. The second advantage is that when you start your SIPs early, you get into the habit of saving early. As you grow older, this habit only deepens its roots, making you a star saver and investor. Another advantage is that since at a young age, you have fewer responsibilities, you can direct more money to investments than you can if you are in your thirties, are married and have children.
Let's see how starting early helps you achieve your goals with a much smaller amount. Say, you want to save Rs 1 crore for a long-term goal, like retirement. You start investing at the age of 25. You have 35 years before you turn 60. You will need to do an SIP of Rs 1,540 monthly in an equity fund, assuming that the fund returns 12 per cent per annum. If you start investing when you are 35, you will have 25 years before you turn 60. Now you will need to do an SIP of Rs 5,270, assuming the same rate of return. Thus, by starting early, you can achieve the same goal by investing much less every month. Alternatively, you can achieve your goals faster when you begin early. This provides you headroom for more aspirational activities and goals later.
Starting early also helps you profit more from the power of compounding. If you start investing Rs 10,000 monthly when you are 25 and raise your SIP contribution by 10 per cent every year, in 35 years (by the time you retire), you will have amassed Rs 14.82 crore. On the other hand, if you start investing Rs 10,000 at the age of 35 and raise your contribution by 10 per cent yearly, you will have a corpus of Rs 3.70 crore when you turn 60. In the former case, your original investment is Rs 3.25 crore and the return generated is Rs 11.57 crore (return is 356 per cent of the capital). In the second case, your original investment is Rs 1.18 crore and the return generated is Rs 2.52 crore (return is 213 per cent of the capital). This shows the power of compounding.
So, if you are young, start your SIPs now. If you are already late, nevermind. Start now and don't forget to pass on the wisdom of starting early to your children.