When you invest ₹9,000 consistently in a mutual fund in equated monthly instalments over a period of 20 years, you can accumulate a total of ₹one crore and three lakh.
This happens when your investments are growing at a compound annual growth rate (CAGR) of 13 percent. In other words, you stand to earn ₹81.5 lakh by investing only ₹21.6 lakh via your monthly EMIs.
This is known as the power of compounding.
This is essentially an increase in the total investment corpus as a result of the interest earned. This tool — often referred to in the context of mutual funds — helps investors grow their wealth significantly. And when planned well, this could turn out to be useful in achieving financial goals or accumulating a large corpus for retirement.
Compound interest refers to earning interest on interest. Every time you earn interest on your principal, it gets added to your original principal amount. So, the next time you earn the interest on the increased principal amount. Over a period of time, your interest will grow dramatically.
Let us understand with the help of an example. When you invest ₹100 and you earn 10 percent return over it, then your total sum becomes ₹110. Next year, if your portfolio rises by another 10 percent then your total investment would swell by ₹11, taking the total investment to ₹121. And in the third year, another 10 percent appreciation would inflate your investment by ₹12, taking it to ₹133.
So, the same percentage of increase i.e., 10 percent leads to an increase of ₹10, ₹11 and ₹12 in three consecutive years. As the time rolls on, the accumulated savings will keep increasing.
This is known as an impact of ‘compounding’, referred to as the ‘magic of investing’ by Jim Rogers, American investor and financial commentator.
| SIP (Rs) | CAGR | Time (years) | Total wealth |
| 9,000 | 13% | 20 | ₹1.03 crore |
| 9,000 | 13% | 21 | ₹1.18 crore |
| 9,000 | 13% | 22 | ₹1.36 crore |
| 9,000 | 13% | 23 | ₹1.55 crore |
(Note: Returns not adjusted for inflation)
Now we come back to our first proposition of investing ₹9,000 consistently for 20 years. If we increase the tenor by one more year, the investment amount increases to ₹1.18 crore in 21 years. And, if we keep increasing the time period by one year, the accumulated investment will skyrocket to ₹1.36 crore in 22 years and 1.55 crore in 23 years, as shown in the table above.
So, we can see that by increasing the time period marginally, while keeping rate of return and EMI amount constant, one can drastically increase the corpus. And this is exactly what they refer to as the ‘magic of compounding’.
Just as in the famous story of tortoise who managed to beat a hare by walking consistently without stopping, in the world of investments as well — investors who are slow and steady can definitely win the race to achieving their financial goals.
