If you invest ₹10,000 monthly for a little over two decades, i.e., 21 years; the returns can accumulate to ₹50.5 lakh. The total sum that is invested amounts to ₹25.2 lakh, and the total wealth gain is ₹25.3 lakh.
This is known as the result of power of compounding.
It is assumed that the investment grows at the rate of 12 percent during these 21 years, while inflation is 6 percent.
Wealth advisors often point out that investors are meant to invest tiny sums consistently to accumulate large amount in order to meet their financial goals via systematic investment plans.
As a result, the magic of compounding makes handling investments a simple affair. Legendary investor Warren Buffett called investing a ‘simple game’ which financial advisors have made harder than it really is.
Notwithstanding how small the investment is, consistency is the key to saving a large amount despite market fluctuations. So, rather than losing hope during a bear phase, or being too hopeful during a bull phase — investors are advised to stay committed to their investment discipline.
|Years||SIP (Rs)||Amount (Rs)||Wealth gain (Rs)||Addition (Rs)|
|7||10,000||10.5 lakh||2.1 lakh||2.1 lakh|
|14||10,000||26.4 lakh||9.6 lakh||7.5 lakh|
|21||10,000||50.5 lakh||25.3 lakh||15.7 lakh|
(Inflation is taken at 6%, and return is 12%)
As we can see in the table above, an amount of ₹10,000 invested consistently for seven years accumulates to ₹10.5 lakh, giving a wealth gain of ₹2.1 lakh while the total investment is ₹8.4 lakh.
In the next seven years, by making the same investment of ₹8.4 lakh – the wealth gain rises to ₹7.5 lakh. And in the last seven years, the increase in wealth jumps to ₹15.7 lakh by keeping the investment same i.e., ₹8.4 lakh.
In other words, when an investor invests ₹10,000 for 21 years, the wealth generated in first seven years at the rate of 12 percent is ₹2.1 lakh. It rises to ₹7.5 lakh in the next seven and ₹15.7 lakh in the last seven years.
This is the result of power of compounding.