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# Inflation is glorified; delay is the silent threat to investing success

## In the world of investments, three critical factors take centre stage: performance, risk, and cost.

In the world of investments, three critical factors take centre stage: performance, risk, and cost. These elements form the core of countless discussions, and within this trio, cost has emerged as a defining factor in the offerings of today’s major wealth management firms. Moreover, regulatory developments clearly identify cost efficiency as a critical point on the broader agenda of investor protection.

Many seem to associate cost simply with expenses charged by financial product manufacturers and intermediaries. Some savvy investors further the conversation to include the impact of taxes as well. Seasoned investors would include inflation into the mix. Most investors spend a lifetime trying to optimize these costs, despite most of it being out of their control beyond a point.

However, there is a cost that lurks quietly in the shadows. Many have heard about it, most believe in its existence, but it is rarely considered when planning personal finances. This is the cost of delay.

Taking a short detour, let’s revert to the basic math we learned in school and turn to the chapter on compound interest. It is basically simple interest on your principal and then also on the interest accrued, over and over again through the period specified. Think of it as a mathematical representation of the snowball effect.

Zoom in. Imagine reading the compound interest formula. You’ll see that variables like the principal amount and interest rate use regular math operations of multiplication and addition, but time is the one that’s an exponential variable. This means time, as a variable, has the most significant effect on the final amount.

As a matter of serendipity, it is also the variable that most investors have the greatest control on. At any given point in time, the investible amount lies within a certain range. While an investor may attempt to achieve the greatest possible rate of returns, the same is influenced greatly by external factors. Now, talking about time, an investor has relatively higher flexibility in ensuring that the amount is invested for the longest possible duration.

Here is an illustration highlighting the same. An important thing to note is that the illustration seeks to highlight the impact of investment period across different scenarios. All figures used are simply illustrative.

For most in the general public, especially the salaried class, the assumption is that one would ensure regular income form employment for at least 30 years. Considering the same cohort, many tend to put off investing towards longer term goals like retirement for at least a couple of years or till shorter term needs are provided for.

Now, while everyone’s personal finance situation is unique, the above illustration reflects how procrastinating investments or, in other words, investing for a shorter duration has a direct and diminishing impact on the final corpus accumulated. A 10-year delay could erode almost three-fourths of the potential corpus. At the same time, increasing the monthly investment by three times also does not compensate for the lost time well enough. The final amount would still be lower by a fourth.

Investors must realise that the path to investment success is rather straightforward. The mantra is to start as early as possible, with as much as possible, for as long as possible. The best way to enhance the result further is to top-up investments as often as possible by as much as possible. This is a framework that grants a solid foundation. The final outcome does of course depend on the nuances such as asset allocation, product selection, investment strategy and similar.

To those well-versed in the subjects of time and money, the saying ‘time is money’ isn’t a mere cliché but a fundamental truth.

Nirav Karkera is head of research of Fisdom, a wealth technology platform.

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Published: 08 Nov 2023, 11:02 PM IST
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