The best time to start an SIP

In Delhi, 33-year-old Neha Bahri has a similar story to tell. “I started SIP at the age of 20 years in my first job itself. I had a small salary of ₹ 20,000 but I was conscious about saving from the start. Saving via an SIP allowed me to start with a small amount,” said Bahri. She doesn’t have a plan for her investments yet but it gives her a sense of security. “Being a working mother, I want to be financially secure,” said Bahari.

The early start made by Shenoy and Bahri is commendable, yet cases like these are still far and few. A 2021 survey conducted by Aditya Birla Sun Life Mutual Fund with its own investors revealed that only 24% investors started their first SIP in their 20s, whereas 42% respondents did so in their 40s.

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Experts say that the financial excitement of a first job and aspirations in young age often prompt young earners to give spending precedence over investing. Moreover, urgency to save doesn’t kick in as the financial goals seem far in the future. “Instant gratification compels people to spend today rather than postponing it for an elusive tomorrow. As one nears their goals, such as retirement, they wake up to investments,” said Hemant Agarwal, CFP and founder – Rupaiyaah.

Prableen Bajpai, founder, Finfix Research & Analytics, calls out another common fallacy among youngsters that they start saving when they are earning enough after a few years into their career.

“With age, income increases but so do the percentage of expenses that cannot be reduced. On the other hand, at a young age, even if an individual is earning less, the liabilities are mostly limited. This makes it easier to take a plunge into investing without undue pressure.”

Benefits of long investment horizon

By starting early, investors have time on their side, which translates into various benefits. One, compounding has a significant impact on their portfolio compared to those who invest for a shorter term. Even if someone starts late and invests more, they will still accumulate a smaller corpus due to missing out on compounding. For instance, a 25-year-old who invests ₹10,000 every month at 12% yearly return will accumulate ₹1.9 crore by the time he turns 50 years of age, while a 35-year-old with an SIP of ₹20,000 will have ₹1 crore. Also take note that the 35-year-old would have invested ₹36 lakh in total, whereas the 25-year-old’s investment amount stands at ₹30 lakh.

Even if people don’t have a defined financial goal at the start of their career, they can simply save to build their wealth or save for retirement. The earlier you start, the smaller will be your SIP outflow and you can comfortably save up without burdening your overall finances (see table).

A long-term investment horizon also gives room to take maximum exposure in high-risk equity investments. Take the case of Shenoy, whose entire mutual fund portfolio is in equity funds as he is still at least 15 years away from retirement.

The reverse is also true, as per Kartik Sankaran, founder, Fiscal Fitness. “An early start allows investors to target moderate returns and there is no need to hit a proverbial six with every ball. A ₹10,000 SIP for 35 years at a reasonable 12% gives you a ₹5 crore corpus. However, if you delay to 40 years, then you either need to earn 26% yearly return for 20 years, which is highly improbable and forces you to take unnecessary risks, or you need to save ₹55,000 a month, which also might be challenging.”

Easy for early starters

Numbers aside, inculcating an investment habit in your 20s is key to achieving financial freedom.

Sankaran said people’s attitude to money and savings is generally formed when they are young. “Starting a savings exercise early in one’s career ensures that the habit is formed and solidified early on. It is difficult to change one’s attitude towards money in their late 30s or 40s and hence the ability to save becomes even more challenging as one ages.”

He added that by planning early on, young earners put themselves in a better position to gain financial independence at an early stage. “This gives them the full flexibility to plan their time and lives better.”

Bajpai said those who start investing in their 20s also have a bigger opportunity to learn from their mistakes as the cushion to withstand a setback is more. One gets ample time to build a dynamic investment plan as per their risk appetite and they can change the asset allocation as per market conditions and timeline of financial goals.

For instance, while Bahri started with equity mutual funds, she has slowly diversified in debt options as she cannot stomach the massive fall in her portfolio during market downturns.

Accordingly, she has adjusted the investment amount she needs to set aside every month as per the return expectations from her debt investments.