How big is the difference between 10% returns and 15% returns?
A lot of people do not understand how much difference 5% extra returns can make, over a long period of time.
Let us take an example: You decide to purchase a new phone. But instead of buying a high-end smartphone costing ₹ 40,000 you decide to buy a phone for ₹ 30,000.
You saved ₹ 10k – which you decide to invest.
At the end of 1 year:
- 10% returns would convert 10k into 11k.
- 15% returns would convert 10k into 11.5k.
Decent, but not huge.
But what about 5, 10, 20 and 40 years?
The numbers will shock you.
|20 years||73,281||2 lakh||1.3 lakh|
|25 years||1.2 lakhs||4.2 lakh||3 lakh|
|30 years||2 lakh||8,8 lakh||6.8 lakh|
|40 years||5.4 lakh||38,9 lakh||33.5 lakh|
|50 years||14.5 lakh||1.73 crore||1.58 crore|
Here is an unbelievable fact: If you can compound your money at 15% , a small amount of ₹ 10,000 which you save on a mobile phone today, can become ₹ 39 lakh in 40 years and ₹ 1.7 crore in 50 years!
Isn’t that mind-boggling?
Now, look closely at the ‘difference’ column in the table above.
Initially, the difference was small. After 3 years, the difference between 10% and 15% was just ₹ 2158.
As time passed, the ‘power of compounding’ started to take effect and the difference kept getting bigger and bigger.
Why are we comparing 10% and 15%? Most people invest in real estate and Gold in India. Historically, the average returns from these two asset classes has been around 9 to 11%.
On the other hand, Sensex which started at 100 points back in 1978-79 has reached 60,000 points today.
The average returns from the stock market index has been 14-16% over the last 40 years.
With a young population and a fast-growing economy, there is immense potential for growth in the next 20-25 years for India.
When the stock market has given compounded returns of around 15% over the last 40 years, it is expected to give similar returns for the next 20 years too.
In other words, a small amount of 10,000 invested in the stock market today could be valued at 2 lakhs in 20 years. That’s 20x returns.
Whereas, other asset classes which have historically yielded 10% returns could turn your 10,000 into 73,000 in 20 years – which is around 7x returns.
10k every month at 15%
A few people might be thinking – what if I can invest 10,000 every month?!
Here’s the answer.
10,000 invested every month with returns of 15%:
|3 years||4.57 lakh|
|5 years||8.97 lakh|
|10 years||27.9 lakh|
|15 years||67.7 lakh|
|20 years||1.5 crore|
|25 years||3.3 crore|
|30 years||7 crore|
|40 years||31 crore|
|50 years||140 crore|
140 crore sounds unbelievable? Well, the number is correct. That again, is the power of compounding.
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.”