An important step is to get rid of the misconception that to start investments you need substantial or large savings. The truth is that it is starting investments early, rather than big amounts, is what makes the difference. Here is how.

How Time Is More Important Than Investment Amount

Let us examine growth stories of money for two friends Virat and Rohit, both in their first jobs, and the lessons they hold out.

Small, early start vs delayed start

Virat saves only Rs 1,000 every month, starting investments in the first year of the job. Assuming the investment grows at 8% annually, Virat saves 73,477 after five years.

Rohit takes his time and finally starts investing 2 years later. To match Virat’s savings after 5 years, in 3 years, Rohit must invest a much higher amount of Rs 1,813 i.e., 80% higher.

Lesson #1

An early start even with a small amount helps you save more while a delay requires disproportionately higher effort. The other option for a late starter is to seek investment options with potential for higher returns. But such options come with higher risks that a person may deem inappropriate.

How small money can make big money

In our story of Virat and Rohit, with Rs 1,000 monthly investment starting two years after Virat, Rohit reaches Rs 40,536, when Virat is at Rs 73,477 at the end of 5 years. That is Rs 33,121 less than Virat.

At the end of tenth year, Virat and Rohit will have saved Rs 1,82,946 and Rs 1,33,868, respectively. Or the savings gap has increased to Rs 49,078. At the end of 20 years for Virat that would have more than doubled the gap to Rs 1.09 lakh with Virat’s and Rohit’s savings being Rs 5.89 lakh and Rs 4.80 lakh, respectively. The obvious question is what is the cause behind the ever increasing savings gap? Let us take a closer look.

At the end of 20th year, Virat has earned interest or returns of Rs 3.49 lakh for his total contribution of Rs 2.40 lakh i.e., 145% of his contribution. Compare this with Rohit’s Rs 2.64 lakh for his contribution of Rs 2.16 lakh i.e., 122% of contribution. The answer to the amazing results lies in primary school maths topic of compounded interest or growth. Do you remember the following formula?

A=P(1+r/100)ⁿ

where A is the amount, P being the principal, r the interest rate and n the period of investment.

Rohit’s first investment of Rs 1,000 gets becomes 1.46 times after 5 years, 2.15 times and 4.66 times after 10 and 20 years, respectively. Similarly, every single regular investment similarly multiplies based on the period of investment. Thus, longer the period, greater the multiplier (The above is an illustration and provided for understanding purposes).

Lesson #2

The process of multiplying money with compounded growth involves allowing enough time to work on money so it can make more money.

How mutual funds help start small

For those wondering how to get started early with small amounts, help is at hand through SIP facility offered by mutual funds, with SIP full form being Systematic Investment Plan. SIP meaning explained simply is a regular investment facility from mutual funds that allows investments of a pre-decided amount in any mutual fund scheme.

Regular investments made with SIPs help investors buy more units when the market is down and lesser units when the market is up. This lowers the average cost of buying units in the long term and the investor gains when the market typically goes up in the long term. A great advantage of SIP is that it instils an investment discipline with investment typically happening upfront before you can start using your salary.

SIP investment can be made in tax saving mutual funds like ELSS, with ELSS full form being Equity Linked Savings Scheme. For long term needs, beginners can also invest in other equity mutual funds such as index funds and large cap mutual funds.

While investments in equity mutual funds typically experience market turbulence in the short term, they can potentially be highly rewarding in the long term i.e., 8-10 years or more.

How periodic hikes in investments help

In our example, one way of the Rohit making his money grow even faster after starting with small regular investments is to periodically increase the regular investment amount. This is facilitated with annual pay hikes. A significant part of the pay hike can supplement existing investments.

Mutual funds can help invest lump sums with Top Up SIPs. This is a type of SIP where the SIP investment amount is periodically increased by a pre-decided percentage, say 10% annually. Thus, with a 10% annual increase of starting Rs 1,000 monthly investment, Rohit can save Rs 88,954, Rs 2.76 lakh and Rs 13.27 lakh after 5, 10 and 20 years, respectively. Compare this with Rs 73,477, Rs 1,82,946 and Rs 5.89 lakh saved with a regular monthly investment of Rs 1,000 (The above is an illustration and provided for understanding purposes. The returns can vary depending on the market conditions). As you can observe, the difference between savings with constant and Top Up SIP investment amounts keeps getting larger with time.

Investors starting early with small investments can also subsequently invest lump sums like bonus, refunds and pay arrears. This can be done with Systematic Transfer Plan (STP) facility offered by mutual funds. Here, the lump is first parked in a low risk, liquid fund, or short term debt fund, and then, like an SIP, regular investments are made in a mutual fund scheme of choice.

Lesson #3

Even after starting with small investments, with periodic increases in regular investments, one can save large amounts quickly.

To conclude, a key determinant in our success of achieving financial goals is the time we provide our investments to grow. Early start even with a small but regular amount can eventually help the young to save big amounts in the long term.