scorecardresearchMagic of compounding: How you can save ₹8000 a month for a cool ₹2 crore!

Magic of compounding: How you can save 8000 a month for a cool 2 crore!

Updated: 03 Aug 2022, 02:48 PM IST

The small investment made over a long period can give a huge return in a long time. We explain what this means

If you invest  <span class='webrupee'>₹</span>8,000 for 15 years, it will grow to  <span class='webrupee'>₹</span>19,75,286 assuming that the fund gave a return of 10 percent give inflation at 6 percent&nbsp;

If you invest 8,000 for 15 years, it will grow to 19,75,286 assuming that the fund gave a return of 10 percent give inflation at 6 percent 

Have you ever wondered how much your money will grow if you regularly invest a small sum over a long period of time? And by small, we mean really small (say 7,000 - 8,000 a month) and by long period, we mean longer than 10 years, i.e., say 15 years.

Wealth advisors and investment experts often unanimously assert that retail investors should invest small amounts, albeit regularly, to accumulate enough savings to meet their financial goals.

The magic of compounding, thus, makes handling investments an extremely simple affair. Even legendary investor Warren Buffett called investing a ‘simple game’ that financial advisors have made harder than it really is.

Regardless of how tiny the investment is, consistency is the key to saving a large corpus notwithstanding market fluctuations. So, rather than losing hope during a bear phase, or getting carried away during a bull phase — investors should stay committed to their investment discipline.

Let us fund out what this means:

If you invest only 8,000 consistently for 15 years, it will grow to 19,75,286 assuming that the fund gave a return of 10 percent. This is after including inflation at the rate of 6 percent. The total investment in this case is 14.4 lakh while total wealth gain is 5.4 lakh.

At the same time, if you increase the monthly investment merely by 500 ( 8,000 + 500 = 8,500) while keeping the rate of return and time period constant, the corpus grows by 1.23 lakh to 20,98,742. 

Alternatively, if the rate of return increases from 10 to 12 percent, while the other factors remain constant — the total return would increase from 19.8 lakh to 23.4 lakh.

SIP (Rs)                        Rate of interest (%)Time (years)Total sum (Rs)
8,000                                        101519.75 lakh
8,500                         101520.98 lakh
8,000                                 121523.4 lakh

Now, imagine the same 8000 per month saving but a different time-frame. Say, 30 years. 

In 15 years, if you got 20 lakh from your 8000 a month on a 10 percent return, the same would be a whopping 1.8 crore in 30 years. 

That's 10 times in 15 years! 

Now, that's the magic of compounding.

From these calculations, it is crystal clear that an amount which would otherwise be spent on eating outs or avoidable entertainment in a month’s time can cumulatively grow into a big sum if invested in a mutual fund so long as it delivers a healthy, if not exceptional, return year after year.

Needless to mention that investors should start investing as soon as possible to give adequate time for investments to grow. In other words, time is key to investing without which planning your investments is futile. So, the magic of compounding is possible only when time is on your side.

This way, you will not only beat inflation but will also accumulate a corpus to meet your financial goals such as child’s education, retirement planning, buying a house, a vacation abroad, so on and so forth.

And no matter how amateur you are to the world of investments; you must have heard the famous of tortoise who could beat a hare by walking consistently without stopping. The moral of the story there stands true to investments as well — slow and steady wins the race!

We explain here the concept of magic of compounding 
First Published: 03 Aug 2022, 02:48 PM IST