Opportunity Cost of Investment Delay

Dear Friends,

                   I was reading a financial magazine yesterday that carried this simple message of “Opportunity Cost of Investment Delay” which I thought I will illustrate with an example of my own. The message is not something that we are unaware, but the impact that it creates with an illustration is immense and thought provoking.

 Ajay and Vijay are friends of the same age and wanted to start saving for their retirement at the age of 30. They decide to save 1 lakh a year. However, only Ajay starts to act immediately and kick starts the investment at the age of 30. Vijay procrastinates and does not act. After 10 years when the friends turn 40, they meet up and again discuss on the topic of investing for retirement. While Ajay feels happy that he was able to invest 1 lakh every year for the past 10 years, Vijay realizes that he has failed to act and decides to invest with discipline immediately. Now Vijay starts to invest meticulously every year but Ajay has other commitments and hence discontinues his discipline of investing for retirement.

Ajay and Vijay have turned 60 now and they decide to meet and again discuss the topic. At 15% return of investment, Ajay has accumulated a corpus of ₹382,14,680/- (3.82 Crores) whereas Vijay at the same ROI was able to accumulate a corpus of  ₹117,81,012/- (1.17 Crores) only.

Please note that though Ajay invested only 10 lakhs for 10 years, he was able to accumulate 3.25 times the corpus of Vijay who has invested 20 lakhs over 20 years.

Key Takeaways

The earlier you start investing, the better your chances of reaching your financial goals. Though the power of compounding has done its wonders in both the scenarios, the larger the time you allow your money to work, the larger the corpus you will be able to create.

A = P * (1+r) ^n

In the above formula of compound interest, while people pay a lot of attention to “r” or the rate of interest, the factor of time “n” i.e. number of years is equally of importance. When you invest in Mutual Funds, you have a control of the parameters “P” which is the amount of investment and the duration “n”. Rate of interest or ROI in MFs is something that the MF managers and the economy influence and your financial advisor will keep an eye on it.

So, start early and stay invested for long and you will be aptly rewarded for your patience.

<Blog # PenguWIN 1016 – Opportunity Cost of Investment Delay>