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The most valuable knowledge of investing

business Updated: Jun 06, 2016 06:29 IST

READING ABOUT technology startups, one sometimes comes across the term ‘minimum viable product’, or MVP.

This is defined as product which has been developed to the point where it just enough features to be used and tested by real users. If rightly designed, then applying the Pareto principle, it possibly has that 20% of the features that satisfies 80% of the needs.

This makes me wonder if there is an equivalent in terms of knowledge about investing. Is there a level of minimum viable knowledge (MVK) about investing? Is there a set of MVK, which means that saver who has it will be fine and invest his or her money well?

I think there is and it has surprisingly few items on it. The biggest item in MVK would be an understanding of compound interest, which probably covers about 50 of the 80 percentage points required by the Pareto principle.

The reason is that the biggest problem that Indian savers face is not that the more esoteric ones but that they don’t start early enough. If they do, they don’t save enough, and in most cases waste these years on investments that don’t pay enough.

Here’s the obligatory example. An investment of Rs 1 lakh for 25 years at 10% return becomes Rs 12 lakh. And if you invest a little late (for 20 years) and a little less (Rs 80,000) and earn a little less (8%), you will earn Rs 4 lakh instead of 12. One third!

Those who understand how compounded earnings work never make this mistake. Down the years, there’s a huge advantage for starting to invest at the age of 25 instead of 30. But then, who knew this at the age of 25? A small number does. Be a part of that.