Power of Compounding: Start early, stay invested for long!

The best asset class for investing money – proven across several successful countries (including India) – is without doubt the equity market. But the two most important factors, which are often not understood are starting early and staying invested for a long period of time.

It’s only when you stay invested for decades that the ‘Power Of Compounding’ really kicks into effect. Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”

In other words, when you invest money wisely, the power of compounding works in your favour. When you take loans from the bank and pay interest, compounding works against you. (More on this in another article).

If you start investing at the age of 15 and live upto 85 (like the world’s most successful investor Warren Buffet) – a single rupee compounded at 25% can become 50 lakhs! Even if you are a little late to investing, a small sum of Rs 10,000 at 20% can become Rs 50 lakhs in 35 years.

In the below table, the ‘Power Of Compounding’ is highlighted. If you invest 1 lakh and earn interest of 7% (Fixed Deposit), 10% (Debt Funds), 19-20% (good mutual funds) – the difference is as follows:

Some important points:

• The reason why 19% and 20% were chosen in the above table is to highlight the difference between ‘Direct Mutual Funds’ and ‘Regular Mutual Funds’ (which your financial advisor sells). 1% which goes to your broker or advisor, can make a huge difference in long term investing.
• The above table also shows the significant difference between investing in ‘Fixed Deposit’ (earning 7% yearly) and equity (15-20% or more). 1 lakh kept in the bank for 50 years will only become 30 lakhs, while the same amount if you manage to compound at 20% can make you super-wealthy with 91 crore in 50 years!
• In fact, in the 19th year itself, a successful equity investor can beat 50 years of ‘Fixed Deposit’ returns.

Please note, that the entire above calculation is for an investment of 1 lakh only. Most people these days should be able to save much more. You can imagine the power of systematic investment plan (SIP), investing even 10,000 per month consistently can make a huge difference in the long run.

To sum up: The key to become rich for those just starting out – save as much as possible in your early years, invest in the best asset class and stay invested for long.