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Power of Compounding: Start early, stay invested for long!

The best asset class for investing money – proven across several successful countries (including India) – is without doubt the equity market. But the two most important factors, which are often not understood are starting early and staying invested for a long period of time.

It’s only when you stay invested for decades that the ‘Power Of Compounding’ really kicks into effect. Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”

In other words, when you invest money wisely, the power of compounding works in your favour. When you take loans from the bank and pay interest, compounding works against you. (More on this in another article).

If you start investing at the age of 15 and live upto 85 (like the world’s most successful investor Warren Buffet) – a single rupee compounded at 25% can become 50 lakhs! Even if you are a little late to investing, a small sum of Rs 10,000 at 20% can become Rs 50 lakhs in 35 years.

In the below table, the ‘Power Of Compounding’ is highlighted. If you invest 1 lakh and earn interest of 7% (Fixed Deposit), 10% (Debt Funds), 19-20% (good mutual funds) – the difference is as follows:

Years 7% 10% 19% 20%
0 1,00,000 1,00,000 1,00,000 1,00,000
1 1,07,000 1,10,000 1,19,000 1,20,000
2 1,14,490 1,21,000 1,41,610 1,44,000
3 1,22,504 1,33,100 1,68,516 1,72,800
4 1,31,080 1,46,410 2,00,534 2,07,360
5 1,40,255 1,61,051 2,38,635 2,48,832
6 1,50,073 1,77,156 2,83,976 2,98,598
7 1,60,578 1,94,872 3,37,932 3,58,318
8 1,71,819 2,14,359 4,02,139 4,29,982
9 1,83,846 2,35,795 4,78,545 5,15,978
10 1,96,715 2,59,374 5,69,468 6,19,174
11 2,10,485 2,85,312 6,77,667 7,43,008
12 2,25,219 3,13,843 8,06,424 8,91,610
13 2,40,985 3,45,227 9,59,645 10,69,932
14 2,57,853 3,79,750 11,41,977 12,83,918
15 2,75,903 4,17,725 13,58,953 15,40,702
16 2,95,216 4,59,497 16,17,154 18,48,843
17 3,15,882 5,05,447 19,24,413 22,18,611
18 3,37,993 5,55,992 22,90,052 26,62,333
19 3,61,653 6,11,591 27,25,162 31,94,800
20 3,86,968 6,72,750 32,42,942 38,33,760
21 4,14,056 7,40,025 38,59,101 46,00,512
22 4,43,040 8,14,027 45,92,331 55,20,614
23 4,74,053 8,95,430 54,64,873 66,24,737
24 5,07,237 9,84,973 65,03,199 79,49,685
25 5,42,743 10,83,471 77,38,807 95,39,622
26 5,80,735 11,91,818 92,09,181 1,14,47,546
27 6,21,387 13,10,999 1,09,58,925 1,37,37,055
28 6,64,884 14,42,099 1,30,41,121 1,64,84,466
29 7,11,426 15,86,309 1,55,18,934 1,97,81,359
30 7,61,226 17,44,940 1,84,67,531 2,37,37,631
31 8,14,511 19,19,434 2,19,76,362 2,84,85,158
32 8,71,527 21,11,378 2,61,51,871 3,41,82,189
33 9,32,534 23,22,515 3,11,20,726 4,10,18,627
34 9,97,811 25,54,767 3,70,33,664 4,92,22,352
35 10,67,658 28,10,244 4,40,70,061 5,90,66,823
36 11,42,394 30,91,268 5,24,43,372 7,08,80,188
37 12,22,362 34,00,395 6,24,07,613 8,50,56,225
38 13,07,927 37,40,434 7,42,65,059 10,20,67,470
39 13,99,482 41,14,478 8,83,75,421 12,24,80,964
40 14,97,446 45,25,926 10,51,66,751 14,69,77,157
41 16,02,267 49,78,518 12,51,48,433 17,63,72,588
42 17,14,426 54,76,370 14,89,26,636 21,16,47,106
43 18,34,435 60,24,007 17,72,22,696 25,39,76,527
44 19,62,846 66,26,408 21,08,95,009 30,47,71,832
45 21,00,245 72,89,048 25,09,65,060 36,57,26,199
46 22,47,262 80,17,953 29,86,48,422 43,88,71,439
47 24,04,571 88,19,749 35,53,91,622 52,66,45,726
48 25,72,891 97,01,723 42,29,16,030 63,19,74,872
49 27,52,993 1,06,71,896 50,32,70,076 75,83,69,846
50 29,45,703 1,17,39,085 59,88,91,390 91,00,43,815

Some important points:

  • The reason why 19% and 20% were chosen in the above table is to highlight the difference between ‘Direct Mutual Funds’ and ‘Regular Mutual Funds’ (which your financial advisor sells). 1% which goes to your broker or advisor, can make a huge difference in long term investing.
  • The above table also shows the significant difference between investing in ‘Fixed Deposit’ (earning 7% yearly) and equity (15-20% or more). 1 lakh kept in the bank for 50 years will only become 30 lakhs, while the same amount if you manage to compound at 20% can make you super-wealthy with 91 crore in 50 years!
  • In fact, in the 19th year itself, a successful equity investor can beat 50 years of ‘Fixed Deposit’ returns.

Please note, that the entire above calculation is for an investment of 1 lakh only. Most people these days should be able to save much more. You can imagine the power of systematic investment plan (SIP), investing even 10,000 per month consistently can make a huge difference in the long run.

To sum up: The key to become rich for those just starting out – save as much as possible in your early years, invest in the best asset class and stay invested for long.

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