POWER OF COMPOUNDING

Written by Harnisha Patil

April 10, 2021

Compounding

Have you ever thought that you want to make money, without putting much effort into it.

So that you can save it for future after your retirement?

So, there’s a simple way I can suggest you to put in your money.

It is called compounding, and it can help you exponentially grow your money over a period of time. While picking individual stocks can be fun, exciting, and give investors the possibility of outsized returns, most investors will do just fine over the long term with either an index fund or diversified exchange-traded fund (ETF).

If you remain invested over a long period of time in, good stocks or mutual funds, you benefit by the time period of your holding.

BREIF IDEA ABOUT COMPOUNDING

So, when interest is added to the principal amount of an investment or deposit, it is known as compound interest. The accumulated interest is added to the principal amount and the interest for the upcoming period is calculated on the new amount. This process is repeated throughout the investment’s tenure. So basically, the interest is calculated on the compounding of the principal amount and the interest generated previously.

USES AND BENEFITS OF COMPOUNDING

One of the biggest benefits that investors can appreciate about the power of compounding is the value of time. With time, you could gain returns, and the yields on these returns could further generate returns; thus, helping to increase your investments quickly.

Invest early – the longer your money is invested, the more time it has to grow. When it comes to compounding returns, time is an advantage. Contribute regularly – regardless of the amount – the important thing is to start and be consistent. Saving money and earning compound interest amount every year is a good thing. But what if you were to invest a fixed amount each month? This small act could boost your returns over time. Let’s find out how that is possible.

HOW COMPOUNDING ACTUALLY WORKS!

EXAMPLE 1: – Let’s make it clear with the help of an example: Consider you have bought a share of company x and the price of Rs 100. The stock of this company is expected to grow at the rate of 10% per annum. After 1 year your 100 will get an interest of 10 rupees and become 110. Now the real fun begins after the first year. In case of compounding you will get 10 of 110 (the current market price of the stock) which is equal to 11, which means you are getting 10% more interest than your previous one. If it would have been the case of simple interest you would have still got 10 rupees.

EXAMPLE 2: – Let me show you how actually can you do it.

Suppose you earn a salary of ₹50,000 per month.

If you invest 10% of your salary i.e. ₹5000 into stock market every month for a period of 12 months which is 1 year.

So, in total you invest ₹60,000 for one year as your one-time investment. If you don’t touch that particular amount and keep it for a period of 5 years you get 10% interest each year on your interest.

YEARSINVESTMENTINTERESTAMOUNTTOTAL
16000010%600066000
26600010%660072600
37260010%726079860
47986010%798687846
58784610%8784.696630.6

So here you’re only investing ₹5000 per month for a tenure of one year and keep it for a period of 5 years you’re earing ₹36,630.60 just as an interest if you also keep on investing in it for years you’ll earn more and more.

Also as I said, longer the period of holding, higher will be the returns.

Discussing it particularly in context of the stock market you can take the above example, and calculate the future expected price of the stock at the expected rate of the growth. Compounding is a very powerful tool when it comes to long term investment. It has not much significance in your short-term investment.

You don’t need to be a financial expert to benefit from the power of compounding. Every investor can take advantage of this concept and put it to good use. So, start investing today to enjoy a great future. I advise you all to start out your investment journey as early as possible to reap the benefits of compounding. You can choose your investment options from a variety of stocks available depending on your investment goals.

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20 Comments

  1. Sweety

    Quite informative!👍

    Reply
    • Harnisha Patil

      Thank you for the appreciation

      Reply
  2. Mayank Limkar

    Very well written with detail 💯

    Reply
    • Harnisha Patil

      Good to hear a positive response. thank you.

      Reply
  3. Khushi Patil

    Well written informative 👍🏻

    Reply
    • Harnisha Patil

      Thank you khushi❤️❤️

      Reply
  4. Sejal Khedekar

    Great work!!

    Reply
    • Harnisha Patil

      Thanks sej💓

      Reply
  5. Suraj

    Very informative, keep it up 👍

    Reply
    • Harnisha Patil

      Thank you bhaiya 🙏

      Reply
  6. Yash

    Really knowledgeable, nice work👌

    Reply
    • Harnisha Patil

      Thank you yash❤️

      Reply
  7. Rohit Singh

    Very Informative

    Reply
    • Harnisha Patil

      Thank you rohit

      Reply
  8. ANJALI

    Very informative.
    💕👌

    Reply
    • Harnisha Patil

      Thanks anjali

      Reply
  9. Pragati Pandey

    Well articulated 🤝

    Reply
    • Harnisha Patil

      Thank you so much

      Reply
  10. Abhay Kagale

    Very helpful information.

    Reply
    • Harnisha Patil

      Thanks a lot

      Reply

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