Twenties is the age when you start earning and begin to understand the concept of investment. This is the time when along with fundamental understanding about financial instruments, you even have some surplus amount in hand to invest. Among the known financial instruments, mutual fund is one of the prudent investment options. It is because, this instrument holds a higher potential to provide inflation beating return than fixed income instruments by a wide margin over the long term. Note that long-term mutual funds here are equity funds.
Read on to knowthe top 3 reasons why mutual funds for beginners is a suitable choice:
- Endows the benefit of compounding
Compounding is the concept of generating returns from your existing returns. Owing to the compounding effect, with time your investment multiplies at a faster pace than the scenario if you invested late. For instance, suppose if you at 24years of age invest only Rs 4,000 per month at 13% assumed annualized returns, you will be able to form a corpus of Rs 3.84 crore by the time you turn 60 years old. However, in case you delay your investment by 20 years then at 44 years of age, you will need to invest a monthly investment amount of Rs 60,200 to form the same corpus at the same annualized return rate. And if you invest the same amount of Rs 4,000 for 16 years, you will just be able to accumulate Rs 25.23 lakh at the same return rate. Thus, the earlier you begin investing, the less investible surplus you would require for building your financial goal corpus. Investing to fulfill the same financial goal in later years requires higher contribution.
Involvement of a longer time horizon in mutual funds endow you with relatively more time to recover from market volatility and acquire the power of compounding. Using the SIP route of investment is recommended because your contributions towards mutual funds get deducted automatically from your savings account at predetermined intervals. It helps maintain financial discipline and roots you out of the perils of market timing because it averages your investment cost during bearish market/market correction phases.
- Adds in financial discipline
When you begin investing at a young age, it shows that you are committed towards building an adequate corpus for your long-term financial goals like retirement, child’s higher education, etc., through investment in long term mutual funds. Young earning stages are prudent learning times to instill the habit of financial discipline. Investing at a young age can help you attain an adequate corpus for your financial goals earlier than your estimated time horizon. Investing through SIP mode in a mutual fund is the best way of inculcating financial discipline in your life.
- Provides higher risk tolerance level
One of the major facts is that the younger you are, the higher is your risk tolerance level due to the minimal financial obligation or responsibility towards your family. With age as your family grows, you tend to become conservative. Moreover, owing to the luxury of time due to young age, volatile market movements are way easier for you to digest as you have sufficient time to rectify your financial plan if anything takes an incorrect turn.
Earlier you begin investing, the better it is for you. Thus, if you have a surplus investible amount in hand and are looking for the right time to invest in a mutual fund, note that waiting for the right time to invest in the market makes you lose out the potential to generate adequate corpus through smaller regular investments. Choose the SIP mode to invest in mutual funds as it helps you invest small amounts at predefined intervals, which instills financial discipline and removes the need for market timing.