By investing small amounts consistently, one can manage to accumulate a huge wealth. For instance, when an investment gives a return of 12 percent on a compounded basis, the investment can grow double in a span of nearly six years i.e., a growth of 100 percent.
The key to building wealth step-by-step lies in what is commonly known as the ‘magic of compounding’.
Mutual fund advisors suggest that investors can grow wealth to meet their financial goals by regularly investing small sums via SIPs (systematic investment plans).
The magic of compounding, thus, makes handling investments a simple affair. Legendary investor Warren Buffett once called investing a ‘simple game’ which financial advisors have made harder than it really is.
However, the proof of the pudding is in the eating. To be able to see how this works, one can examine the performance of any well-performing scheme and assess how the investment can swell over a period of time.
For example, Sundaram Multi Cap Fund has delivered a compounded return of 15.29 percent in the past 10 years, according to the (direct) returns data given on AMFI, as on January 6, 2023.
Sundaram Multi Cap Fund
This fund was launched in October 2022 (regular) and in January 2013 (direct). Its key constituent stocks include RIL, SBI, ICICI Bank, HDFC Bank, Axis Bank, Infosys Bank, Hindustan Unilever and ICRA.
The fund scheme is managed by Sudhir Kedia and Ratish B Varier, and the average assets under management (AUM) are ₹1,917 crore.
At the compounded rate of 15.29 percent, if someone invests a paltry sum of ₹12,000 every month for a period of three years, it swells to ₹5,50,756 by contributing ₹4,32,000.
In five years, an investment of ₹12,000 would have grown to ₹10,85,007 by investing only ₹7,20,000.
|Years||Amount invested (Rs)||Accumulated sum (Rs)||Wealth Generation (Rs)||Increase (Rs)|
(According to CAGR of 15.29 percent as on Jan 6, 2023: AMFI data)
Likewise, in seven years — a regular investment of ₹12,000 would have swelled to ₹18,08,965 by contributing a total of only 10,08,000.
And the magic of compounding works further. If an investor had made a consistent investment of ₹12,000 via an EMI for 10 years – the corpus would have swelled to ₹34,04,287. while the total sum invested amounts to only ₹14,40,000.
Also, the increase in wealth accelerates towards the end of 10-year tenure. For example, in the first three years, total increase in wealth was over ₹1.18 lakh, whereas in the last three years, the increase in wealth stood at ₹11.6 lakh.
To sum up, we can recapitulate to say that the magic of compounding enables investors to build wealth over a period of time.
And by investing a small amount of ₹12,000 in a fund scheme that has given a compounded return of 15.29 percent, one could have accumulated more than ₹34 lakh by contributing ₹14.40 lakh only.
(Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.)