Investment Over Investment Returns

The most fundamental aspect that impacts wealth creation and is ignored by a majority of individuals is the investment amount. Undoubtedly, return is a crucial factor but if you desire to create a huge corpus you have to invest a huge corpus over period of time

The adventurous year 2021 has come to an end and hitherto we have welcomed the year 2022 with joy and zeal. Consequently, continuing with the same enthusiasm you should kick-start this year by thinking, planning and imple- menting your financial plan in order to serve various financial commitments in a better manner which you might come across in your near as well as long future. People are getting aware about the fact that an individual must save some percentage of their income which they can utilise to fulfil their future obligations. In today’s rising inflation world, is it sufficient to just save your income? Obviously, no! You cannot create wealth by just saving since with time inflation will eat up the value of your savings.

Hence, with the aim to create wealth you should invest your money in investment instruments which can deliver inflation- beating returns. Now another question might pop up in your mind: what is the difference between saving and investing? Many of you assume that what you are saving is investment. But that is not the case. There is a lot of difference between investing and saving and the major one lies in how much risk you are ready to take. Saving is the process of setting some portion of your income aside for future spending by parking it in bank accounts. Investing is the process of utilising your funds or money to purchase assets that create value over a period of time and deliver higher returns in exchange for taking higher risk.

Generally, low-risk-takers save money and high-risk-takers invest money. In case of savings, an individual may park his money in bank accounts and in case of investing an individual may park his money in various assets such as mutual funds, stocks, real estate, gold, etc. The saved money is available relatively on an immediate basis as and when you need it for purchases and emergencies and it has extremely low risk while being highly liquid. Nevertheless, in the case of investment, you get your invested amount in addition to returns on invested money by selling your assets for a profit or realising capital gains. Of course you may incur loss too while liquidating your investment.

Importance of Investments and Returns
Let’s have a look at how investment amount matters more than returns. Normally, we have come across many people who look for investment instruments which deliver higher returns. They are simply concerned about the returns and they search for such funds and stocks online or act on suggestions given by friends and traders. Such people tend to waste their time and either end up investing nowhere or investing huge amounts in trendy stocks or mutual funds with an urge to become rich overnight. This can be disastrous many a times. In reality, true wealth can’t be created in one day. It’s possible to create wealth over period of time if one is regular, patient and disciplined with his investments.

The most fundamental aspect that impacts wealth creation and is ignored by a majority of individuals is the investment amount. Undoubtedly, return is a crucial factor but if you desire to create a huge corpus you have to invest a huge corpus over period of time. In the initial stages of the investing process parking a sizeable amount of corpus over some selected frequency will aid you generate a grand amount. Initially focusing on returns instead of investment amount is a mistake most of us commit. Ideally, a sound investor will focus on investing large amounts as in the initial years the impact of compounding is slow which takes up traction over time.

Therefore, the principal amount we are investing in the initial years does the major heavy lifting. Higher amount of invest- ment in the initial years will significantly improve returns in the future. Return starts playing an important role in the wealth creation process only over a period of time. If your investment does not receive optimal returns then you might have to extend your financial goal or change your asset allocation to include riskier assets. Thus, while creating wealth, how much you invest is of great importance in the initial years even if you do not receive great returns.

Although, as investment years pass by one should make sure that the returns you are receiving from your investment are sufficient in order to reach your goals. To get a deeper under- standing about the above concept, let’s look at an example. Let us assume the case of two investors, Vedant Shah and Harsh Pandit. Both start their monthly SIPs in equity mutual funds.

Vedant invests Rs6,000 per month whereas Harsh invests Rs12,000 per month. Let us suppose that they invest for 10 years. Vedant’s investment will earn him 15 per cent and Harsh’s investment will earn him 10 per cent. Given these parameters, let’s take a look at how much amount they will accumulate after 10 years:

As is evident from the table above, Harsh was able to create a larger corpus as compared to Vedant. Not even in 10 years was Vedant able to beat the corpus of Harsh. Harsh was able to create approximately Rs8 lakhs more than Vedant even when he was yielding higher returns. Harsh was able to create 48 per cent higher corpus than Vedant. What if Vedant and Harsh had decided to invest 5 per cent and 10 per cent of their income at the rate of 15 per cent and 10 per cent, respectively? How many years would Vedant take to go ahead of Harsh where their annual income is Rs5,00,000 which increases by 5 per cent every year?

From the table above we come to know the importance of investing a larger amount in the initial years. Vedant took 24 years to go ahead of Harsh in terms of the value of investment. From this example we come to know how investing a larger amount in the initial stage of the investing process is crucial to create wealth. Returns are of equal importance; however, not very essential in the preliminary stage. As and when the investor moves ahead with his investment, he can look for returns since compounding starts working like magic. Besides, a larger principal amount invested in earlier years helps you achieve your goals smoothly. Let’s have a look at how much time is taken to reach Rs1 crore by investing Rs1 lakh annually at the rate of 10 per cent.

As is clear from the above example, initially investment returns do not account much but as investment moves further it takes less time to accomplish your goal. In the above example it took 6.78 years to reach the first Rs10 lakhs and then the time went on decreasing to four years, three years, two years, one year and so on. It takes lesser amount of time to accumulate each additional Rs10 lakhs because investment returns begin to account for more growth as years pass by. As we can see in the table above, the contribution of annual investment decreases and the contribution of return increases. This proves that initially in the investment process investors should invest a larger amount and after some point in time your investment will start compounding your returns at a faster pace. The red highlighted portion depicts where investment returns’ contribution overtakes the annual investment saving amount contribution.

Conclusion
Your responsibility as an informed individual is to emphasise on what you can control. This means focusing on growing your income, keeping track of your spending, minimising unnecessary spending and upholding an asset allocation that is aligned with your financial goals. Though investment returns are important, in the initial years one should concentrate on the investment amount. The real influence of returns is felt only when the portfolio has crossed a reasonable size. Therefore, in order to increase your chances of maximising your savings, you should aim on starting your investments early and invest as much as you can afford.

Returns are of equal importance;however, not very essential in the preliminary stage. As and when the investment value becomes larger,investors can look for returns since compounding starts working like magic.