Power of compounding 

The most simple and powerful component in mutual fund is compounding .  Great thing about compounding is that you will eventually reach a point where the amount of money reinvested will become greater than principal amount . All you need to do is start investing early , compounding will grow your money for you . 

How compounding works ?

Consider an example to understand how the power of compounding works: Ravi invested Rs 1,00,000 as a lump sum this year. He is going to earn an interest of 12% on this investment every year. Now let's see how much interest Ravi earns over 10 years, if he takes his interest out each year, as compared to letting the principle of compounding work for him.

Scenario 1: Ravi keeps his earned interest aside Scenario 2: Ravi reinvests his interest and lets compounding work
YearPrincipal amountInterest earned (@12%p.a.)YearPrincipal amountInterest earned (@12%p.a.)
11,00,00012,00011,00,00012,000
21,00,00012,00021,12,00013,440
31,00,00012,00031,25,44015,052.8
41,00,00012,00041,40,492.816,859.1
51,00,00012,00051,57,351.918,882.2
61,00,00012,00061,76,234.121,148.1
71,00,00012,00071,97,382.123,685.9
81,00,00012,00082,21,462.726,528.2
91,00,00012,00092,48,038.229,711.6
101,00,00012,000102,77,802.733,276.9
Total interest earned          Rs 1,20,000Total interest earned        Rs 2,10,584.8

Total value of investment  Rs 2,20,000

after 10 years

Total value of investment  Rs 3,10,584.8

after 10 years

 source : hdfc mutual fund

By above example one can understand how compounding works if you reinvest the interest you gained each year. 

More you invest at your young age the more money works for you over time and helps you to achieve financial freedom . 

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