The power of compounding

 In a Einstein way, the compounding is considered miracle in world. When you learn and apply compounding in your life, you will understand the real power of compounding.

Let's know more about compounding with example, when you save 1 lakh in bank FD then 7% interest payout on 1st year on 1 lakh which is your invested amount. So after 1 year your saving amount must be approx 1 Lakh and 7 thousands. Now at the 2nd year 7% interest payout on amount of 1 Lakh and 7 thousands, not your invested amount 1 Lakh. This whole process works on compounding.

So now you can be a Millionaire from compounding with the investment of 1 Lakh.

There are two components of compounding

1. Rate of compounding
2. Time in compounding

1. Rate of compounding:

There are two friends rajiv and sanjiv. And both have 10 lakhs investment amount.

Now Rajiv invest 5 lakhs from 10 lakhs into bank FD which gives him 7℅ interest of his investment. And another 5 Lakhs amount invest in gold which gives on an average 9℅ return. But Sanjiv invest 5 Lakhs of 10 Lakhs in bank's saving account which gives 4℅ return every year. And 5 Lakhs invest in equity mutual funds which gives on an average 17% return. After 20 years Rajiv has around 43.5 Lakhs. And Sanjiv has around 1.10 crore amount. So this is about compounding of Rate.

2. Time in compounding:

There are two friends rajiv and sanjiv. Both are do monthly investment (SIP) and both have same return on an average 14%. But Rajiv invest from the age of 20. And Sanjiv starts invest from the age of 25.now At the age of 40 Rajiv has around 2.3 crores. And Sanjiv has 1.15 crores.

So as we discussed in previous blog the Time in compounding is the best time of investment than yesterday.

Also we discussed we need to get return more than inflation rate it shows Rate of Compounding.

There are some rules of compounding we'll discuss in next blog. 

- Kanan Gandhi

- Unnati Gandhi