Power of Compounding.The Eighth wonder of the world.
Power of Compounding.The eighth wonder of the world. Sir Einstein discovered this compounding factor.Financial experts keep on repeatedly saying to invest in equities.One of the main reason is that the compounding factor.Its essence is that the early you start investing the more your money gets time to make your money compounded i.e. returns on your returns.
I am giving an example for easy understanding.Say you invest ₹100 today i.e. in year 1.This investment continues for 1 year and your investment earns 12% annual return i.e. ₹12.Now in year 2 your investment starts with ₹112(100+12)and this year you earn a return of 10%.At the end of year 2 your earning would be ₹11.20(112*10%).So, in the beginning of year 3, your investment starts with ₹123.20(100+12+11.20). In year 3 you earn @11% annually i.e. ₹13.55.Now at the end of year 3 or in the beginning of year 4 you start with ₹136.75.This keeps on repeating every year.We call it the power of compounding. Earning returns on your returns.
Compounding factor formula: p(1+r)^n
Where, p= Initial investment, r= the annual interest rate, n= is the number of periods
In case of Mutual Funds monthly SIP (Systematic Investment Plan) you get the opportunity to invest on monthly basis and with the help of market ups & downs you get the chance of making rupee cost averaging.In simple terms your cost of investment does not remain constant like PPF or Fixed Deposits.When market is high you acquire lesser units and when market is down you acquire more units.This helps you to acquire more number of units at the year end.
Also,I am sharing a Mutual Fund Sahi Hai video as promoted by AMFI as an Investors awareness campaign.