A king in ancient times, who was pleased with the inventor of chess asked him to name a prize for himself. The inventor said that he would like to have one grain of rice on one square of a chessboard and double its number on the next and so on. The king thought this was a very minor request and granted it. However, he soon realised that the number of grains this implied was far beyond the capacity of the chessboard, his palace and indeed his entire granary (mathematically this comes to 2 to the power of 64). This is the power of compounding.
Compounding means that the returns on your investment also starts earning, and so on. The investment grows faster and faster as time passes, because more and more accumulated returns begins earning interest. Thus 10 lakh invested today would (at 12.5% per year) take 15 years to become 60 lakh. However, it will take just 5 more years to reach a value of 1 crore. Thus, the longer your investments are allowed to grow, the greater are their potential gains.
Mutual Fund investors are often puzzled by how compounding works with funds because equity funds can go up as well as down. Bond funds also exhibit volatility. And how do choices such as growth or dividend and expense ratios affect it? Join us on our latest Money Hangout to get some answers.
Do ka char - What compounding means for your investments
Date: Friday, Mar 31, 2017
Time: 12:30 PM - 1:00 PM
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