Many times we think about Should we invest Now ? Where to invest ? Does it matter lot in which investment avenue we invest ? Lets get a brief answer of all these questions…
Financial world has very important concept of Compound interest which is described as “the eighth wonder of the world” and “the most powerful force in the universe” attributed to Albert Einstein. Compound interest is the interest earned, not only on a loan or investment but also, on the interest previously earned.
Because of this compound interest, a delay of few years can dampen your returns like anything in long run. As the magic of the compound interest can be seen only in long run.
Let’s take an example to of 2 friends Nihar and Alpesh to understand the things. They both started working and joined company together at the age of 20.
Now let’s see first Case of Nihar
As Nihar understands the importance of investing early and benefits of compounding so he spends less money on entertainment and makes sure that he is investing Rs. 50,000 every year.
On this investment Nihar gets 10% return on his investment every year. At the end of 10 years, the accumulated amount is now Rs. 7.96 lakhs. (5,00,000+ 45000+40000+35000+30000+25000+20000+15000+10000+5000). However, due to some issues, Nihar is unable to save more money now but he doesn’t touch the accumulated invested amount. He keeps the amount (Rs. 7.96 lakh) as a fixed deposit in a bank at 10% interest rate till he gets retired at the age of 65. Nihar does not make any fresh investment. The interest keeps on accumulating on Rs. 7.96 lakh till 35 years. Finally at the age of 65 years, he gets Rs. 2.23 crore.
Now let’s see 2nd case of Alpesh
Alpesh spends a lot of money and doesn’t believe in investing early. He starts investing after 15 years when he is 35 years old and invests with discipline for next 30 years. He regularly invests Rs. 50,000 each year till he is 65 years old. Just like Nihar, Alpesh also gets a return of 10% per year. Now at the age of 65, he gets a maturity amount of just Rs. 82.24 lakh.
comparison
Yes, even though Alpesh invested 20 years more and Rs.12 lacs more than Nihar.Niharinvested regularly for only 10 years but Alpesh invested regularly for 30 years. However, Alpesh gets Rs. 1.41 crore less than Nihar. This is almost 63% less.
Therefore, it is important to invest early to get the benefit of compounding.
When we invest early in our lives, the amount keeps growing at a specific interest rate. At the time of maturity, it becomes a big chunk. This is because the growth in amount in later years is lot more, compared to the initial years.
Now we know early investment is very important to build huge money but the other important thing to build huge wealth is returns in long run. Even a difference of single % has huge affect on your wealth in long run.
We suggest to invest early and that too in best returns providing assets for long term. Invest in best stocks to buy as stock market gives highest returns. Stock Market can give returns ranging from 15–25% CARG depending on the product you selected. Now you will think what is the need to invest in stock market as in long term all assets gives fabulous returns because of compounding.
Then my dear let me clarify you one thing even a difference of single % returns in such long period makes huge difference lets understand this also with the help of example.
Now again assume Nihar and Alpesh started together and both invested together 1,00,000 for next 45 years. But now here there is slight difference in returns they are getting. Nihar invested in the 10% returns providing asset and Alpesh invested money in 9% returns providing investment i.e. difference of only 1%.
Now at the end of 45 years here Alpesh will get 57 crores andNihar will get 90 crores. Yes Just the gap of 1% in returns and difference of 36% in final amount.
Now after reading all this you must be thinking to invest as early as possible and as discussed above, stock market is the best returns providing investment option and one more thing in long run Stock market not only provides highest returns but that returns are with lower risk as risk reduces over the long term horizon.
Now which stock to buy in the jungle of so many stocks ??? You can invest in Indian Multibagger Stocks (stocks of the companies with small market share in their industry and which are expected to grow at abnormal rates) and you can also invest even in Value Stocks (Beaten down Stock of the companies that are market leaders in their industry).
Now as this investment is a deep subject so the new question comes is Multibagger Stocks or Value Pick Stocks ? It is not like which is better among both , as both are good but selection is made according to your risk return profile. If you have high risk return profile then go for Multibagger Stocks as these are high momentum Stocks and such companies looks bright initially but may fail even but Value Stocks are very safe kind of stocks for investors with low risk return Profile.
If you have good investment capacity then make investment in both the types of stocks, ratio depends on your risk return Profile and this will give you best investment plan i.e. (Multibagger Stocks + Value Stocks) more the risk taking capacity more proportion of Multibagger stocks and Vice Versa.