The future value of your investment depends on three factors:-
• How much you should invest?
• How much returns you get?
• How long you remain invested?
All three aspects areimportant, if you understand the basic formula for wealth creation:-
Future Value = Invested Amount X (1 + Return)Investment Tenure
Tenure is the most important factor in the formula of compound interest. Let us assume you invested Rs 10 lakhs and the return is 10% p.a. You can see that profit is not growing linearly. In 3 years profit is around Rs 3 lakhs, but in 20 years profit is around Rs 57 lakhs. This is power of compounding (interest on interest).
If you are investing through monthly SIP, the formula for future value shown above applies for each SIP instalment with a modification for converting years to months as shown below: -
Future Value (for each SIP instalment) = Monthly SIP amount X (1 + Return/12) Investment TenureX12
The illustration below depicts how much you can lose in terms of potential wealth creation if you delay your SIP.
You can see that, for the given the assumptions, you are losing nearly Rs 4.6 crores in wealth creation by delaying your SIP by 10 years. In order to catch up, you need to increase your SIP to nearly 3.4 times of what you would have needed if you started early. Cost of investment delay calculator provides valuable insights into the impact of time on investment returns, helping you set realistic financial goals, and make timely decisions. The table below shows how much SIP amount will be needed to reach a wealth creation goal of Rs 1 crore by the age of 50, based on when you start assuming 12% rate of return.
|Age when you start investing
|Monthly SIP required to reach goal
Tenure or time makes money work for you through compounding; your financial goals will be easier to achieve if you start early.