An individual goes through several ups and downs during his/her investment journey. The risk perceptions and investments of every person are different from the other. There are various investment approaches (such as value and growth investing) that an investor can adopt based on the market conditions and individual preferences. One mantra that has worked exceedingly well for all kinds of investors is to start the investment journey as early as possible.
As one of the emerging markets and a nation with a high population of young individuals, India has seen a significant increase in young investors in the past few years. The new age brokerage houses have reported that over 70% of the first-time investors (associated with them) are under the age of 30 years.
There are different reasons why starting early by making intelligent investment choices can be the best thing a person can do to earn high returns on the portfolio.
Here are a few tips that encourage investment from an earlier age:
Benefit of compounding
One of the first benefits an individual investor gets from early investing is the 'compounding effect'. Simply put, the compounding effect refers to the ability of an investment to earn higher returns as interest/dividend of a year can be reinvested in the initial corpus. Hence, delaying an investment to achieve a goal would only mean that the investor might have to shell out a considerable amount of money per month. This is particularly important for retirement planning when an investor makes a systematic investment plan earning a fixed rate of interest compounded monthly or yearly. An early starter, in this case, will always end up with a higher return (and corpus).
Higher risk-taking abilities
Numerous studies have confirmed that the risk-taking abilities of an investor reduce with an increase in age. Furthermore, higher risks are often associated with a higher expectation of return on investments. When an investor starts early, the risk-taking abilities are more; hence, an investment can be made in multi-bagger stocks, and different unconventional sectors can be explored. In addition, with fewer responsibilities, an investor can look ahead to assume higher risks by trading in equities or even F&O for decent returns from limited initial investments.
Improving saving and investing habits during the early years of career progression
Starting systematic or lump sum investment in stock market securities such as equity shares and bonds can cultivate a smart habit of saving among youngsters who have recently started earning. First-time earners can be overwhelmed with a regular inflow of money in their bank accounts for the first time in their lives. Starting investment early ensures that cash flow is managed effectively rather than spent on non-priority items and expenses. For attaining long-term targets such as buying a house, or car, and planning for higher education, proper financial planning is critical. Starting early in the investment journey helps in ensuring that the challenges generally faced at a later stage of life are reduced.
Systematic and small-sized investments
When the investment tenure planned by an individual is long, the investment amount per month or week could be small and per the investor's comfort. The overall level of urgency in the investor's mind is limited; accordingly, informed decisions can be made. The investor can attain the same goals earlier and with less systematic investment in the market. Early starting is always beneficial in the long term.
Investors who begin the investment journey early can conduct a comprehensive market analysis using sophisticated tools that provide information based on fundamental and secondary research. Investing as per an individual's perception and requirements is critical but starting early has a definitive edge in achieving investment goals, preparing budgets, and introducing asset diversification. Periodic rebalancing and eventually enjoying a higher return are other factors that support initiating investments from a young age.
Mr. Prabhakar Tiwari is the Chief Growth Officer at Angel One Ltd.