Equity investments - What is the Right Age to Start Investing in Equities?

Nutan Gupta

15 Nov 2016

An individual invests in the share market in order to earn profit. However, a lot of people still don’t know the right time to start trading on equity market. As the saying goes, ‘The early bird catches the worm’, similarly in equity markets, the one who starts investing at an early age earns more return as compared to a person who starts investing after him.

Investment Planning for a person who wants to retire at the age of 60
Age 25 (Mr. A) 35 (Mr. B)
Years left for retirement 35 25
Assumed Rate of Return 10% 10%
Monthly Investment Rs 5,000 Rs 10,000
Total Investment Value Rs 1.7 crore Rs 1.2 crore

In the above example, Mr. A starts investing at the age of 25 while Mr. B starts investing at the age of 35. Though Mr. B invests double the amount i.e. Rs 10,000, by the time both of them reach the age of 60, the total investment value of Mr. A is more than the investment value of Mr. B. This is because Mr. A stayed invested for a longer period of time and the power of compounding worked for him, though he invested a lower amount of money than Mr. B.

As years pass by, the value of your money decreases as inflation eats into a lot of your savings. Banks provide an interest rate of 4% on the savings account, and with an inflation rate of 7%, the value of your money goes down with every passing year. When you invest money in the equity market for a longer period of time, the money compounds every year, thereby giving you more returns.

The bottom line is that one should start equity investments at an early age so that you can get the benefit of compounding.


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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Equity investments - What is the Right Age to Start Investing in Equities?

Nutan Gupta

15 Nov 2016

An individual invests in the share market in order to earn profit. However, a lot of people still don’t know the right time to start trading on equity market. As the saying goes, ‘The early bird catches the worm’, similarly in equity markets, the one who starts investing at an early age earns more return as compared to a person who starts investing after him.

Investment Planning for a person who wants to retire at the age of 60
Age 25 (Mr. A) 35 (Mr. B)
Years left for retirement 35 25
Assumed Rate of Return 10% 10%
Monthly Investment Rs 5,000 Rs 10,000
Total Investment Value Rs 1.7 crore Rs 1.2 crore

In the above example, Mr. A starts investing at the age of 25 while Mr. B starts investing at the age of 35. Though Mr. B invests double the amount i.e. Rs 10,000, by the time both of them reach the age of 60, the total investment value of Mr. A is more than the investment value of Mr. B. This is because Mr. A stayed invested for a longer period of time and the power of compounding worked for him, though he invested a lower amount of money than Mr. B.

As years pass by, the value of your money decreases as inflation eats into a lot of your savings. Banks provide an interest rate of 4% on the savings account, and with an inflation rate of 7%, the value of your money goes down with every passing year. When you invest money in the equity market for a longer period of time, the money compounds every year, thereby giving you more returns.

The bottom line is that one should start equity investments at an early age so that you can get the benefit of compounding.