A lot of individuals believe in spending more than saving. However, this is not ideal for anyone who wishes to become financially wealthy over the long term. If you do not inculcate the discipline of investing regularly then you will soon find yourself at the mercy of credit card bills. If you fail to pay your bills on time you will soon become debt ridden. Hence, the more you save the better it is. Those who are good a financial planning know the importance of savings and investing. Investing gives your existing wealth to multiply and grow over the long term. Especially if you are investing in market linked schemes in mutual funds.
Market regulator SEBI (Securities and Exchange Board of India) has its own take on mutual funds –
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
The earlier you start investing in mutual funds the better it is. Here is what will happen if you start investing late in mutual funds:
Miss out on power of compounding
Power of compounding can only be witnessed by those who remain invested for the long run. Having a long term investment horizon is ideal for anyone who wishes to see their money multiply through compounding. In mutual funds, compounding refers to interest earned on interest earned from the principal investment amount. The interest earned is invested back in the scheme. In the past several investors have success building a decent corpus from compounding. However it may not be possible for short term investments.
Miss out on long term goals
To meet life’s long term goals –retirement planning, buying a weekend home, lavish wedding for children, sending kids abroad for overseas education – these goals need an investment horizon of at least 15 to 20 years. But if you start investing late, you will have very few years to build a wealthy corpus. Thus you may lose out of meeting your life’s long term financial goals if you start investing late.
You may not be able to have an aggressive portfolio
When you are young and do not have any financial responsibilities, you can actually take more risks and have an equity oriented mutual fund portfolio. Once you are married and have a family of your own, chances of carrying an aggressive portfolio diminish. Although an aggressive portfolio attracts higher risk, it also gives investors an opportunity to seek capital appreciation over the long term.
If you start late, you will have a few years in hand for building wealth. In such a short span of time, you may or may not be able to achieve life’s ultimate financial goals. Hence, it is better to start investing early and keep a long term investment horizon to make the most out of your mutual fund investments.