Unlike other magics, the magic of compounding has to be seen to feel it. When you make a humble investment at a consistent pace for a long time, the investment can grow to a sizeable sum, and towards the latter part of the fund’s tenor; its growth accelerates at a faster pace than during the earlier part.
Wealth advisors and investment experts often assert that investors are supposed to invest small amounts regularly in order to accumulate large amount of savings to meet their financial goals via SIPs (systematic investment plans).
The magic of compounding, thus, makes handling investments an extremely simple affair. Legendary investor Warren Buffett also called investing a ‘simple game’ that financial advisors have made harder than it really is.
So, regardless of how small the investment is, consistency is the key to saving a large corpus despite market fluctuations. Instead of losing hope during a bear phase, or getting carried away during a bull phase — investors should remain committed to their investment discipline.
|Amount (Rs)||Years||Total sum (Rs)|
(Rate of return is 12%, figures not adjusted for inflation)
As the table shows, the increase in investment amounts to ₹30.45 lakh between seven years to 12; and in the next five years, the increase in investment amounts to ₹54.44 lakh.
This is the power of compounding.
In other words, when the same amount ( ₹16,000) is invested for the same time period (i.e., five years) giving the same rate of return (i.e., 12%), the accumulated figure turns out to be different — ₹30.45 lakh in the first five years, and ₹54.44 lakh in the latter five.
Now, let us suppose that we increase the tenure by another 17 years, the accumulated sum will now increase to a whopping ₹9.20 crore.
So — as the chart above indicates — the savings accumulate to ₹1.06 crore in the first 17 years, and in the next 17 years, they grow by ₹8.14 crore.
To paraphrase it further, the same amount of investment ( ₹16,000 every month) becomes ₹1.06 crore in the first 17 years. And the same amount in the next 17 years becomes ₹8.14 crore.
As a result, the total investment becomes ₹9.20 crore in a total of 34 years.