To optimise the benefits of compounding, you must keep your money invested for a long period of time. The two variables are directly proportional: the longer the time period, the higher the returns. As you grow older, the number of years for which you remain invested reduces. Consequently, if you start investing early, you have more time to exploit the power of compounding.
Consider the graph, Early Bird Advantage. Both Preeti and Rohit invest the same amount, Rs 10,000, every year. However, Preeti starts investing at the age of 25, 10 years before Rohit. By the time they retire at the age of 60, Preeti's corpus (Rs 33.41 lakh) is more than double that of Rohit's (Rs 15.03 lakh) though both investments were earning the same rate of return. This is because, by starting at the age of 25, Preeti invested for 35 years, whereas Rohit invested for 25 years only. The power of compounding yielded better returns for Preeti as she remained invested for a longer time.
A practical reason for starting early is that between the ages of 25-35 years, most people need not dip into their investments for big-ticket expenses, such as children's education or marriage. If you withdraw money from your investments, the effect of the power of compounding gets diluted. As a result, you will be unable to build a very large corpus.
