The current pandemic has highlighted one thing quite clearly among many others, the need for having a safety net while navigating through uncertain times. Job losses and pay cuts have been a sad reality of this pandemic and having a nest egg in such times to fall back on would have provided a much needed relief to any person. While we have established that it is essential to have sound investments, they cannot be just whipped out in a day or two. You have to gradually build your investments to make sure that when you reach your retirement or have a rainy day, these investments can shield you from being helpless.
Need for investing early
Most experts believe that the best way to invest is to start investing early in life right from the time you start earning. If you save at least 20% of your pay each month and invest it in good return bearing schemes, it is enough to give you a good base to earn decent returns over your lifetime. When you are young you also have the benefit of lesser responsibilities. This gives you the chance to be aggressive with your investments in terms of risks. And as the saying goes especially in investments related to stock markets, higher the risk, higher the returns.
Benefits of investing early
There are multiple benefits of investing early when you are still young. Some of such benefits are discussed below.
Get the benefit of compounding
The simple meaning of compounding is multiplying your returns. Compounding is one of the best ways of increasing your returns over a period of time. It is especially beneficial for investors with a long term investment horizon. Mutual funds are an excellent investment option where the benefit of compounding can generate high returns.
Making tax benefits
Investing for young adults is mainly for the purpose of saving tax. There are many tax saving schemes or options available in the market that can help the young adult save significant tax as well as ensure that they meet their investment goals like creating a retirement fund (EPF, PPF, NPS), investing in mutual funds while saving tax (ELSS), etc. By investing early, investors can enjoy the benefit of being taxed at a lower tax bracket as well as many tax benefits like deduction under Chapter VI of the Income tax Act or tax exemptions depending on the type of investment.
Generating a bigger corpus to get higher returns
The biggest benefit of early investments is the opportunity to build a huge corpus. Investors can gradually build a huge corpus fund by starting their investments early even by contributing to such funds on a monthly basis or yearly basis. This helps the investors in building a bigger base that helps in yielding higher returns for the investors.
Building a disciplined approach to saving and investing
While everyone knows investments are an essential part of any person’s financial planning, it is often noticed that many people procrastinate at the start of investments. Starting the investments from an early stage in life ensures that the investors inculcate the habit of saving and effective financial planning to meet their investment goals.
Better choice of investment options
There are many investment options that can be accessed by young investors to increase their wealth and meet their financial objectives. While choosing the investment options, investors have to consider various factors like the risk- return factor, investment objectives or investment budget.
Some of the most common investment tools for the young investors are mentioned below.
Mutual funds are among the most popular investment products preferred by all types of investors whether they are risk averse or risk takers. Investors have a wide variety of options to choose from depending on their investment goals or risk appetite like equity mutual funds, debt mutual funds, growth funds, dividend funds, gilt funds, index funds, etc. Mutual funds generally provide more returns than traditional investment options like fixed deposits, PPF, NPS, etc.
Bank fixed deposits are considered to be a traditional investment mode. These are safer investment tools and can also provide the investor with nominal and steady interest for the period of deposit. Tax saving fixed deposit have a lock-in period of 5 years and tax deduction of Rs. 1,50,000 under section 80C.
PPF (Public Provident Fund) has been a preferred investment option for the masses in India. It provides virtually risk free investment along with the benefit of compounding of interest. The tenure of PPF is 15 years which can be extended for multiple blocks of 5 years.
Real estate is often overlooked by the young investors. Such investors do not prefer to make huge investments needed in real estate. However, young investors can get better interest rates and longer tenure to repay their home loans. Young investors can also avail tax benefits in the form of tax deduction or exemption under various sections of the Income Tax Act, 1961.
NPS (National Pension Scheme) is another government saving scheme that can be started at any age with the aim to build a retirement fund. Investors can get tax deduction under section 80C up to Rs. 1,50,000 and additional tax deduction of Rs. 50,000 under section 80CCD.
Investors can get many attractive options of investment when they start investing at a young age. The benefits of compounding returns along with increased corpus funds are some of the basic advantages of investing from a young age. Such early investment also ensures that investors get into the discipline of making regular investments to meet their financial objectives.