Secret ingredient to create a large retirement fund is time, say mutual fund advisors
Do Indians start planning for retirement only in their 40s and 50s? Many financial planners and mutual fund advisors believe so.
“Most investors come to us for retirement planning, mostly when they are in their 50s or some in their 40s. Planning your retirement becomes difficult with every passing year. I tell my clients that there are two things that you need in your portfolio from day one: emergency fund and retirement fund. Most people don’t have retirement in their mind when they start investing,” says Deepali Sen, Founder, Srujan Financial Advisors.
Why are these experts talking furiously about planning early for retirement?
“Firstly, the closer you are to your retirement; you will have to invest more in a smaller time horizon. Secondly, if you don’t have at least 7-10 years in hand, investing in equities becomes risky. Without equities multiplying your investment is very difficult. Thirdly, retirement is a very important financial goal. If you have an investment horizon of 20-25 years, it become very easy and mitigates the risk also,” says Pankaj Gera, a certified financial planner based in Delhi.
Let us work with an example. Ram started working at 22. He immediately started investing Rs 5,000 via a monthly SIP in a midcap mutual fund scheme. He chose the midcap mutual fund scheme because he was a high risk-taker and he had a really long investment horizon of 30 years. If Ram continues with his invest for the next 30 years and earns around 15 per cent returns on his investments, he would be able to create a retirement corpus of Rs 1.76 crore.
What if Ram starts investing for his retirement after 10 years when he is in his 30s? Assuming an annual return of 15 per cent, he would have managed to create a corpus of Rs 49 lakh at the end of 20 years.
What if he starts investing for his retirement when he is in his 40s? Assuming a similar annual return of 15 per cent, he would have managed to amass a nestegg of Rs 11.61 lakh at the end of 10 years.
As you can see if you have time in hand the power of compounding helps you to multiply your wealth many times. That is why some call it eighth wonder of the world.
Note, the above calculation is just to draw a comparison. Nobody should plan for retirement in this fashion. One has to first find out the target corpus. For more, read: How to calculate your retirement corpus? Then one has to put together an investment plan to achieve the goal.
Mutual fund advisors believe that investing for an extended period ensures higher returns. They believe that one should start planning for their retirement as soon as one starts earning. “Times creates wealth. Starting early would give you the benefit of compounding. We always encourage investors to start investing for retirement as soon as they start investing for their other financial goals,” says Deepali Sen.