How time affects your investments

  • Your-Money Articles

They say time's a funny thing. It can give, and it can also take away. Interestingly, this is also true in the case of your investments.

When you take a closer look at how and why your investments grow (or don't grow), time emerges as the single biggest influencing factor.

Time decides if your investments multiply or deplete.

Time also influences how much your investments multiply or deplete.

To truly make the most of your capital and invest it in the right manner, you need to understand the impact of time on your money. And that's exactly what we're going to discuss today. As always, let's begin at the basics.

Time to get your initial investment amount ready

The first step to get started with investing is to get the money ready. And depending on how much you want to invest, this could take time. For example, say you want to invest in a fixed deposit to earn regular interest. In this case, you will need a sizable lump sum amount to get started. Merely investing Rs. 10,000 will not give you any significant returns. So, you need to take some time to get the investment amount ready.

This is also the case with many other investment options such as real estate. But how do you go about saving up the initial investment amount, in the first place? Well, budgeting can help you with this. Here's what you can do.

  • Identify and note down your income from primary and secondary sources.
  • Jot down all your expenses.
  • Identify the essential outlays and the discretionary spends.
  • Check if it is possible for you to cut any discretionary expenses.
  • Redirect these savings towards your initial investment amount.

Bonus: How to reduce the time needed to get your initial investment amount ready?

If you want to start investing right away, you could always choose investment options that allow you to invest small amounts of money consistently, over the long term, instead of those that require a one-time lump sum investment.

Here are some examples of investment options where you can invest small amounts over time.

  • Recurring deposits
  • Direct equity
  • SIP for mutual funds
  • Unit Linked Insurance Plans (ULIPs)

Time and risk

Time and investment risk are also intricately connected. Broadly speaking, investment risk is higher over the short term and decreases over the long term. This is particularly true for market linked investments, like direct equity and equity funds. However, do keep in mind that the risk only reduces. It is not entirely eliminated.

Your own capacity to tolerate investment risk also changes with time. Generally, when you are younger, you can take on higher risks. This is because of the following reasons.

  • You have a longer time period ahead of you till you retire
  • There is enough time to recover any losses you may make initially

However, with time, your capacity to tolerate risk goes down as retirement gets closer. At this stage, you may be more comfortable investing in fixed income investment options and in assets that give you guaranteed returns, like bonds, FDs, and assured income life insurance plans.

So, time not only affects your investments, but also impacts the kind of investments you choose for your portfolio.

  • When you're an aggressive investor, you choose assets like direct equity, equity mutual funds and real estate.
  • When you're more conservative, you choose safer investment options like PPF, gold and the like.

Time and returns

While there are also other factors at plan, time plays a key role in the returns you earn from your investments. The logic behind this is simple. The more time your money has to grow, the more it grows. The power of compounding is very relevant in this context.

Compounding is simply the process of your interest (or gains) earning more interest (or gains). So, the longer you remain invested, the more your corpus multiplies exponentially. Let's take a look at an example to understand how time affects your returns through the power of compounding.

 

Monthly investments

Investment tenure

Expected annual rate of return

Investment value at the end of the tenure

Total returns

Scenario 1

Rs. 5,000

10 years

8%

Rs. 9.21 lakhs

53.50%

Scenario 2

Rs. 5,000

20 years

8%

Rs. 32.02 lakhs

166.83%


In the first case, you invest for 10 years and your investments grow by 53.50%. But in the second case, you double your investment amount, and your corpus grows by 166.83% instead! That is the effect of time on your returns.

Interestingly, you don't need to actively invest to let time work its magic on your money. Let's take up the first scenario above to see how this works. Say you invest Rs. 5,000 each month for 10 years, at 8% per annum.

Then, instead of withdrawing your funds right away, you simply let your existing investments grow passively for the next 10 years. So, at the end of that period, your corpus would be 19.88 lakhs. That's a return rate of 231.33%.

Time and your goals

Not all life goals come with the same time horizon. Some may be more short-term in nature, like taking a vacation with your family next year, or getting some minor repairs done. Others may take longer to save up for, like making the down payment on your home loan or saving up for your children's college expenses.

Your investments should reflect the time horizon of your life goals. It makes financial sense to use short-term investments for short-term goals, and long-term investments for long-term goals. Factor in the time horizon of each investment option in your portfolio and ensure that it is aligned with your life goals.

For instance, take the following couple of goals.

  • Saving up for a premium purchase

  • Building your retirement fund

The first is a short-term goal, so investments with a shorter horizon and higher liquidity, like a term deposit or a money market fund may be ideal. The second one is a long-term target, and here, you need to consider options with a long-term horizon, like PPF, retirement plans or even income plans like the ABSLI Assured Income Plus, so you can have a steady source of income to rely on post-retirement.

Conclusion

When it comes to investing, time is undoubtedly a crucial factor. And a major part of financial planning is accounting for the way in which time impacts the different aspects of investing. When you are charting out your financial plan, you need to consider how timing will change your risk-return profile and affect the way in which you achieve your life goals.

Read next: WHY START INVESTING AS EARLY AS POSSIBLE

The time and age at which you start investing is also important. Interested in learning more about this? We have a blog that tells you why you should start investing early.

Read it here

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Disclaimer

ABSLI Assured Income Plus (UIN: 109N127V04) is a non-linked non-participating individual life insurance savings plan. GST and any other applicable taxes will be added (extra) to your premium and levied as per extant tax laws. An extra premium may be charged as per our then existing underwriting guidelines for substandard lives, smokers or people having hazardous occupations etc. For policies issued on minor life, the date of commencement of risk shall be the date of commencement of the policy. Where a policy is issued on a minor life, the policy will vest after attainment of majority of the Life Insured. Where the Life Insured (whether major or minor) and Proposer/Policyholder is different, on the death of the Proposer/Policyholder, his legal heirs, in accordance with the existing succession laws, will be considered as new Proposer/Policyholder. As there is no death benefit payable on the death of the Proposer/Policyholder, the policy status does not change, and the policy continues.
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