One of the basic rules of investing is that time in the market actually matters more than timing the market. If you identify a good stock or a good equity fund and hold it for a long time, then you are bound to create a good deal of wealth.
But this can affect your wealth substantially, if there is a delay in your investing decision. Let us first look at how delaying your investment decision makes an impact on the wealth you can create.
Impact on lumpsum investment
Rajesh Diwan, who received Rs 20 lakh as his share from the sale of ancestral land holding in his village, wants to keep the funds in safe and liquid form for a few years before putting the corpus in an equity fund. He has a total of 20 years left for retirement. He is considering three scenarios wherein he holds it in liquid funds for five, 10 and 15 years and then invests the corpus inequity funds.
In all three scenarios, the time period of 20 years is the same and the starting corpus is also the same. But after 20 years Scenario 1 would have made Diwan rich 1.5 times, as compared to Scenario 2.
In Scenario 1, Diwan will keep the money in liquid funds for only three years and then shift it into equity funds for 17 years. In Scenario 2, Diwan will hold the funds in liquid funds for 10 years and only then will he transfer the corpus into an equity funds.
The liquid fund is not an investment, as it does not grow your money. It is just a parking of funds for liquidity purposes. The real investment happens when you allocate the money to equity funds. Scenario 2 delays that and pays the price in the form of lower wealth creation.
Impact on SIP investment
Let us look at two friends who do Systematic Investment Plans (SIPs) of progressively larger amounts, but start later.
The above illustration explains the consequences of starting late on your investments in case of SIP. Ajay starts early and gives himself 30 years. Despite the lowest monthly SIP and the lowest total investment allocation, he has created the maximum wealth. Adwaith starts last and despite contributing twice as much as Ajay, he creates less than half the wealth that Ajay has created at the age of 55.
The moral of the story is that whether it is lump-sum or SIP, you need to start investing early. The later you start, the lesser time you give your investments to compound resulting in lower wealth creation. Time matters in this business and delays in investing can have a huge cost.
The writer head of research and ARQ, Angel Broking
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Rajesh Diwan, who received Rs 20 lakh as his share from the sale of ancestral land holding in his village, wants to keep the funds in safe and liquid form for a few years before putting the corpus in an equity fund. He has a total of 20 years left for retirement. He is considering three scenarios wherein he holds it in liquid funds for five, 10 and 15 years and then invests the corpus inequity funds. )
Let us look at two friends who do Systematic Investment Plans (SIPs) of progressively larger amounts, but start later.
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