Today and Tomorrow had been best friends since their college days. Both had similar ambitions and career paths, but when it came to financial planning, their investment strategies were vastly different.
Today – The Early Bird Mutual Fund Investor
Right after getting his first job at 22, Today decided to start investing in a mutual fund through a Systematic Investment Plan (SIP). He committed to investing ₹5,000 per month in an equity mutual fund that historically offered an average return of 12% per annum. Today consistently invested in his SIP for the next 25 years.
Tomorrow – The Late Starter in Mutual Fund Investments
Tomorrow, on the other hand, delayed investing in mutual funds. He prioritized spending over saving, thinking he would start investing once he had financial stability. Finally, at the age of 32, Tomorrow realized the importance of mutual fund investments and started his SIP of ₹5,000 per month in the same equity mutual fund, earning the same 12% annual return. However, he could only invest for 15 years, until he turned 47.
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The Power of Compounding in Mutual Funds – A Shocking Difference
After completing their respective investment periods, both friends decided to check their mutual fund corpus. Here’s how their investments performed:
Investor | SIP Amount | Investment Period | Total Invested Amount | Final Corpus (at 12% CAGR) |
Today | ₹5,000 | 25 years | ₹15,00,000 | ₹84,70,000 |
Tomorrow | ₹5,000 | 15 years | ₹9,00,000 | ₹25,00,000 |
Today’s disciplined and early investment of ₹15 lakh grew to ₹84.7 lakh, while Tomorrow’s delayed investment of ₹9 lakh grew to just ₹25 lakh. Even though Today invested only ₹6 lakh more than Tomorrow, the power of compounding in mutual funds resulted in an extra ₹59.7 lakh in wealth.
Key Takeaways for Mutual Fund Investors
Start Early: The earlier you start investing in mutual funds, the higher the benefit from compounding.
Consistency Matters: Regular SIP investments help in wealth creation over time.
Delaying Costs Money: Procrastinating on investments significantly reduces long-term gains.
Mutual Funds are Powerful Tools: Equity mutual funds, when given time, can generate substantial wealth.