Mutual Fund Course

The time to start is now

The earlier you start, the better it is - all thanks to compounding.

The time to start is nowAnand Kumar

dhanak हिंदी में भी पढ़ें read-in-hindi

Even if you can save Rs 500-1,000 every month from today, you'd be astonished at how your wealth can grow over the years.

That's because of the power of compounding.

Compounding helps your money grow faster because it also invests the gain you make on your investment. In other words, compounding means the interest you earn on your interest.

Say your initial investment of Rs 100 increases by 10 per cent every year. At the end of the first year, your money would grow to Rs 110. The next year, it would go up to Rs 121. That's because you earn on your original investment of Rs 100 and also on the interest you received in the first year (Rs 10 x 10 per cent = Re 1).

A Rs 100 example may not show the true worth of compounding, as it's too small a number. Let's give you a better example to show its magic.

When Pooja started working at 25, she invested Rs 10,000 each month for the next 25 years. That means she invested a total of Rs 30 lakh during that period. If you assume her investment grew 12 per cent every year, she managed to accumulate around Rs 1.8 crore by the age of 50!

By contrast, if Pooja's money grew at simple interest (where only the money invested grows, and not the additional gains), her money would grow to Rs 75 lakh only. That's a difference of more than Rs 1 crore!

That is the magic of compounding.

Compounding allows you to start small - and start early
The earlier example shows the power of starting small. Now, let's look at how compounding works wonders if you start early.

Let's assume Pooja spent too much time enjoying her life and started investing ten years later, at age 35.

To make up for lost time, she invested Rs 17,000 per month for 15 years. However, despite making the same investment of Rs 30 lakh and earning the same 12 per cent rate of return, her investment reached Rs 85 lakh at the age of 50. That's almost Rs 95 lakh less than if she had started early!

Yes, Rs 95 lakh. That's how much you lose if you start late.

Instinctively, the human mind seems capable only of arithmetic (simple) growth and not geometric (compounded) growth.

The fact that investment growing at 10 per cent a year would grow more than double in the first ten years, about six times in the next ten and nearly 16 times in further ten years, isn't evident to most people.

The time to start is nowAprajita Anushree

Now that you know today is the best time to invest, the next question is: where to invest and how to maximise the power of compounding. The next chapter answers these questions for you.

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