Power of Compounding - What it actually means

Compounding is the first step towards long-term wealth creation. Compounding allows you to earn interest on your principal and on the interest that you reinvest. It helps you build a large corpus over time with the smallest of initial investment.

For example:
Suppose you invest Rs.1,00,000 today for a period of 30 years, this is what you would earn under various rate of returns:

Here is decoding it for you:

Few things are obvious. If you had kept money in the bank for 30 years you would have earned 5%. Your Rs.1,00,000 would have become Rs.4,32,000. But since the inflation is more (approximately 8%) you would have actually lost money. If you are smart enough to invest in a mutual fund and got a return of 15% pa, your Rs.1,00,00 would have become Rs.66,21,000. This is far better than what you would've earned in a bank. 

If you are smart trader dealing directly in the stock market, you would've earned anything from 20% to 30% pa depending on your trading style (swing trader/derivatives trader/investor etc).

As you can see, it is not enough that you work for money but you should also ensure that the money works for you. According to Warren Buffet, people who cannot make their money work for them, end up working for the rest of their life for money.


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