“Compound interest is the 8th wonder of the world. He who understands it earns it and he who doesn’t pays it.” – Albert Einstein
Power of Compounding
Albert Einstein rightly said that compound interest is the 8th wonder of the world. Compounding is a very powerful concept. This is because the interest of your invested money is also earning interest. The value of the investment keeps growing at a geometric rate (always increasing) than at an arithmetic rate (straight-line). Your money keeps on multiplying over a period of time. Also, compounding is a long-term concept. And by long-term, I mean 15-30 years. Investing early is as important as investing wisely. Just a small amount can increase your earnings rapidly. Let’s see how an Rs 15K investment can earn you Rs 10 Cr.
Rs 15,000 SIP at an assumed CAGR of 15% for 15 years can give you return of Rs 1 Crore upon maturity. With just an investment of Rs 27 lakhs spread across 15 years can fetch you Rs 1 Crore.
But, there is also the 15*15*30 rule which you should be aware of.
Rs 15,000 SIP at an assumed CAGR of 15% for 30 years can give you return of Rs 10 Crore upon maturity. By just increasing your tenure by 15 years one can get 10 times more return. The investment amount is Rs 54 lakhs but the amount accumulated by then is Rs 10 Crore.
I’m now sure you would now believe why compounding is so powerful. But do note that 15% CAGR means 15% average return over a period of time and not 15% annual return. One can experience a 20% return one year and -5% the next year. The average will be 15% over the period of time. Equity funds have beaten inflation and all the other asset classes in the long term (10 – 15+ years).
Benefits of SIP Investment
So I would strongly recommend investors to invest in mutual funds through SIP. One of the biggest benefits of SIP investment is compounding. SIP not just gives the benefit of compounding. It has other benefits too.
When a fixed amount is invested regularly over a period of time through different market cycles, one can get more units when the price is low and fewer units when the price is high. This reduces the average cost of investment in the long run.
Levels out market fluctuations
Since mutual funds units are being bought regularly by way of SIP, short-term market fluctuations are leveled out. Also, one has to ensure they are not investing in a SIP way too regularly. For example, weekly or fortnightly. If one has a weekly or fortnightly systematic investment plan, they will look at their investments too often. The short-term ups and downs might affect their investment decisions, which can be avoided by a monthly systematic investment plan.
By investing a fixed amount out of regular savings, one is forcing themselves to get used to a fixed investment pattern. This will help them build a corpus for their long-term financial needs. Money not invested often gets spent on consumption and compromises the long-term goals of the investors.
Simple and easy to monitor
With a regular monthly investment, tracking of investments becomes easy and convenient. Also, SIP investment has become much simpler just at the click of a button.
A SIP can be stopped any time at one’s convenience. The SIP can be paused, or the SIP amount can be increased or decreased at any time during the SIP’s tenure.
SIP gives return only over a period of long-term. Its important one sticks to an investment for at least a period of 10 years for higher returns. Patience is the key to success. Stay invested for long to earn higher returns.
Guy Spier said, “Long-term compounding is an investor’s best friend, so why to get in its way”. So do not get in the way of your investments in short-term. Remember, compounding only works in the long term.