In India, when it comes to retirement planning, many assume that there is still a lot of time to do so. However, it can be said that the earlier an individual begins to invest, the more time the money has to appreciate. As a result, the individual will be in a better position in the long run. The secret to a comfortable retirement is easy, the earlier, the better. In this article, we shall enrich the arguments on why it is important to invest early in the context of India and share some tips on how one can initiate the process of investment for retirement.
Why Start Early?
One of the most powerful reasons to start investing early is the magic of compound interest. Simply put, compound interest is the interest on interest principle where the returns that an investor generates from his or her investment starts generating returns as well. This creates a snowball round effect in which the accumulation of wealth grows at an increased pace after a period.
Let’s break this down in a way that makes sense for you: You can invest ₹1,00,000 into an instrument which is expected to give an average return of 8% per annum. In year one interest to be earned is ₹8,000. In the next year, you will earn 8% for not only the principal amount of ₹1,00,000 you put in the previous year, but also for the interest amount of ₹8,000 earned the previous year. In the long term, this cumulative/compounding effect tends to increase and it leads to growth in money at an even faster pace.
By starting your investment early, you give your money less than that year to accrue. The risk and the effect of compounding are also one and the same in that both are positive to the extent money is invested for a longer period of time. This means that if an individual starts undertaking retirement savings in their 20s or early 30s womb, more wealth could be accumulated at the time of reaching a retirement age.
The Significance of Time
Typically in the Indian scenario, people don’t begin to save for retirement until most often in the later forties or fifties years as a result of the belief that they will catch up. However, the position of having to start at possibily much older years means that one will have to contribute prohibitively high amounts during the monthly contributions for a given retirement objective.
Now, let us go ahead and consider how the concern of starting early makes amazing differences:
Consider, for example, Amit and Ravi. The two men are of the same age and plan to retire when they are sixty years old but have varying investing habits.
At 25 years old, Amit invests monthly in an equity mutual fund with a 12% average annual return, and starts investing Rs.10,000 every month.
Ravi, however, is 35 when he commences the investment of Rs.10,000 on a monthly basis with the same return of 12% after a few years.
The two individuals have the same amount of investment on a monthly basis, however due to a time duration of 10 years ahead of Ravi, Amit’s investment shall be invested more.
At the age of 60, Amit’s final investment balance will also be somewhere around ₹4.2 crores whereas for Ravi may be roughly ₹2.2 crores. This variation occurs as a result of ties with time as in this case because Amit’s funds enjoyed the power of compounding for ten more additional years.
The Importance of Inflation within the Indian Economic System
As discussed earlier, inflation is another reason which encourages one to begin investing as early as possible, inflation eats away the value of the money making it less useful in the creation of wealth over time. In India, it has been observed that the inflation indices stand between 5-7%, hence if it is said that today one’s purchasing power is ind 1000 ten years down the line one may be able to suppy worth of ind 700. If you provide only fixed deposits for interest or use savings bank accounts, there is a possibility that at the end of the term the value of the money has shrunk because even the interest earned did not beat inflation.
The earlier you start investing, the better your chances of making positive real returns which offset the rise in cost, eroding your purchasing power. Investing in equity plans for instance, equity mutual funds which are focused on the equity equity markets have been seen to give the investors better rates of returns than the common saving accounts or fixed deposits which come in handy to the persons seeking to invest for the long tern for the woman’s retirement age.
The Best Investment Options for Completing Early Retirement Planning in India
While preparing for all those years in advance, there is a necessity for owing well In India there are several investment avenues offered to individuals for the purpose of retirement planning , deterring upwards their risk appetite and financial goals.
Here are the few investment options that you can look forward to:
1. Equity Mutual Funds
In previous years, equity mutual funds have generated much greater returns than investment options such as fixed deposits or PPF accounts. Therefore, one may invest in a well diversified equity mutual fund as early as possible. Doing so will allow one to reap the benefits of the stock market over a long period, as such markets are known to perform above inflation rates in due time. You may consider investing in stocks such as blue chip stocks, dividend paying stocks, and debt free stocks, as they have demonstrated strong performance in the past and typically offer lower risk.
2. Public Provident Fund
In India, PPF is one of the most sought after investment options for the long term. It is backed by the government which means that it is a secure means of investing your funds. PPF deposits are categorized as tax saving structured public fund and hence tax deduction on investment up to Rs 70000 is applicable thanks to section 80C of the Income Tax Act. But, it is subordinated to equities in terms of returns, therefore, it is recommended to use it along with other aggressive risky investment options.
3. National Pension System
NPS is a type of pension scheme that the government offers and it permits investment in both equities and debt instruments. This certainly is the plan for retirement benefits a person would want to use for his or her children’s marriage or any other kind of long-term saving that does not attract prosecution undertakeniller tax – benefitting investment. NPS has an in-built provision for investing in diversified asset classes based on the risk appetite of the investor.
4. Investing in Properties
They can also purchase properties with the populations of these features, such as for retirement benefits in growing economies in India, the real estate investment may be one of an ideal means to accumulate wealth. Real estate requires more capital initially and is not quick to sell as compared to the other forms of investments. It is more so for an investor who is looking for income and is willing to purchase and hold property over the period of time.
5. Gold
Gold has been a classic hedge against both inflation and an investment diversification tool. Although gold does doesn’t generate contributions on a quarterly or yearly basis as do equities or bonds, for instance, it does appreciate in value over the long run making it an ideal candidate for a retirement plan in India.
How Much Money Should One Invest?
It is better to save around 15-20% of one’s monthly income towards retirement. The sooner one does that, the less burden there will be to save a bigger amount towards the end of the saving’s period. Retirement planning being subjective in nature, use web-based tools which are retirement planning calulators to calculate the amount you are expected to invest based on your retirement goals, expected way of living and anticipated rates of inflation and other factors.
In conclusion
The golden rule of bringing up your children with expectations of a lavish retirement in India is very simple, begin all your investments as soon as you can. With the concept of simple and compound interest, the right age of investing, considering the rise in living costs and inflation, and the right places to put money in, it is possible to create and sustain a good retirement corpus. The most important thing is to beat the clock. You could be in your 20’s or 30’s and it does not matter – the more you palm it off, the more difficult it becomes to get your retirement goals.
Getting started investment sooner does not necessarily mean major compromises or unreasonable exposure to risk. It means regularity, strategies and the patience to allow invested capital to grow through appreciation over time. So, initiate the process today. Pssst! Your older self would be grateful.