When it comes to long-term investing, the amount invested is only one part of the equation. Equally important is the length of time your money remains invested. Even when the investment amount is exactly the same, starting earlier may significantly influence the potential value of your investment over the long term.
This is where a lumpsum calculator can be useful. It helps estimate how a one-time investment may potentially grow over a chosen investment horizon based on an assumed rate of return.
Let us understand this concept with a simple example.
The power of time in investing
Suppose three individuals each invest ₹1 lakh as a one-time investment, but at different ages:
| Age at investment | Investment amount | Assumed annual return* | Investment period |
| 25 | ₹1,00,000 | 12% | 30 years |
| 35 | ₹1,00,000 | 12% | 20 years |
| 45 | ₹1,00,000 | 12% | 10 years |
Using the compound growth formula, the estimated values could look like this:
| Age at investment | Investment period | Potential future value* |
| 25 | 30 years | ₹29.96 lakh |
| 35 | 20 years | ₹9.65 lakh |
| 45 | 10 years | ₹3.10 lakh |
*Illustrative calculations based on a 12% assumed annual return.
The difference is noticeable. Although each person invested the same ₹1 lakh, the investor who started at age 25 had an additional 20 years for compounding to potentially work. This demonstrates how time can influence the potential growth of an investment.
The figures shown are for illustrative purpose only
Why does starting earlier matter?
Compounding occurs when returns generated by an investment are reinvested, allowing potential growth on both the original amount and accumulated gains. While growth may appear modest initially, a longer investment horizon may provide more opportunity for compounding to influence investment outcomes over time.
This does not mean investing later is ineffective, but it highlights the importance of time when planning for long-term financial goals. Alongside the investment amount, the length of time money remains invested can be an important factor in determining an investment’s potential future value.
Understanding the role of a calculator
A calculator helps estimate the potential future value of a one-time investment based on three key inputs:
- Initial investment amount
- Expected rate of return
- Investment duration
The calculator then estimates the future value of the investment using a standard compounding formula.
Using a standard compounding formula, it provides projections that can help investors compare different scenarios and understand how time may influence potential growth.
The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
A practical illustration
Consider two people who each receive a bonus of ₹1 lakh. One decides to invest it at age 30 and remains invested for 30 years, while the other invests the same amount at age 40 and remains invested for 20 years. Even though both invested the same sum, the earlier investor may accumulate a larger corpus because the investment had more time for potential growth.
This example highlights an important aspect of long-term investing. Waiting for the “right” time could reduce the duration available for potential compounding. While market conditions can influence short-term outcomes, time in the market may be an important consideration when evaluating long-term investment plans.
The figures shown are for illustrative purpose only
Factors that influence future value
Several factors beyond time can influence an investment’s potential long-term growth:
Rate of return
The assumed rate of return can affect projected investment values, although actual returns may vary and are not guaranteed.
Investment duration
A longer investment period may provide more time for compounding to potentially influence investment outcomes.
Market conditions
Factors such as inflation, interest rates and market movements can affect investment performance over time.
Investment discipline
Staying invested for the planned duration may help investors benefit from the potential impact of long-term compounding.
Conclusion
A one-time investment of ₹1 lakh may potentially grow differently depending on how long it remains invested, highlighting the role that time and compounding can play in long-term investing. Tools such as a lumpsum calculator can help illustrate different growth scenarios, but these projections are only estimates and not guarantees of future returns. As investment outcomes can vary, it is important to consider individual financial goals, risk tolerance and investment horizon before making any investment decisions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Limited does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
