Compounding: The 8th Wonder of the World

"Stock market hits new peak"

"Hope rally continues, BSE Sensex at new high"

"Acche Din for Economy - Sensex Extends Record Run"

Judging by these headlines; it seems that stock markets are reaching new highs every second day. Almost too good to be true isn’t it! While economists are still theorizing as to why the Indian stock market has been trading at a record highs, the fact remains that our share bazaar has taken the “be positive” thought way too seriously. But does this mean, as investors, we should start getting over positive and trigger happy with our investments?

Remember – Successful mutual fund investors have one thing in common: their ability to be disciplined by holding their portfolio during the market swings, and earn further gains on the initial gains and so on - over a longer period of time.

As they do this, they have a simple formula on their side called the Power of Compounding. As referred by one of the world’s most famous physicist as the 8th wonder of the world, compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In simpler words, the interest you will earn from your invested amount will be re-invested, and thus increase your principle amount.

Let us assume that instead of the shot of espresso at the nearest café costs Rs. 30. You decide to forego the coffee and invest the amount instead, here’s what it could add up to after 25 years...

*(Compounded Annually)
Clearly, the table shows that the longer you leave your money invested and the higher the rate of return, the faster your wealth will grow.

“Sounds great!” you say. “How can I make this amount of money? How can I make the power of compounding work for me?”

You can make the power of compounding work for you by investing for the long term in mutual funds. Regulated by the Securities and Exchange Board of India (SEBI), a mutual fund is a professionally managed pool of money from many investors and that is invested in stocks, bonds, short-term money market instruments and other securities in accordance with objectives as disclosed in scheme information document of a Mutual Fund Scheme. Mutual funds are managed by investment experts also called fund managers, who invest the money on behalf of the investors.

You may harness the power of compounding through what is known as a Systematic Investment Plan or an SIP. An SIP is a vehicle offered by mutual funds to help investors save money wisely and regularly in order to meet their financial goals effectively. It is an investment strategy which allows an investor to invest the same amount in a particular mutual fund at a specified time period. It may be daily, weekly, fortnightly, monthly, quarterly depending on the will of the investor. Your SIP investments will help you invest regularly with either more units when the markets are low and less units when the markets are high.

With all these reasons to invest in mutual fund and profit from the compounding of your money, all you need to do is make a wise decision of choosing a fund whose objective matches to your investment objective and monitor it from time-to-time. However, you should also consult a financial advisor before selecting any tool for investments.