Another Article on Compounding

In Investing, and life, we hear a lot about compounding, Compounding is the 8th wonder of the World, Compounding Is Exponential Growth and so and so.

I’m sure you must be saying, “Oh! Another Article on Compounding.” That’s why I gave this article the same name. But from this article, you will take something very valuable.

What Is Compounding?

To brief you about Compounding in any rare case if you are the one who never heard about it, “It is adding interest back to the principal to earn more interest.”

For example, You invested Rs.1,00,000 @ 10% Per annum,

At End of Year 1, it would be Rs.1,10,000

At End of Year 2, it would be Rs.1,21,000

At End of Year 3, it would be Rs.1,33,100

At End of Year 10, it would be Rs.2,59,374

At End of Year 30, it would be Rs.17,44,940

At End of Year 100, it would be Rs.1,37,80,61,234 (Yes! 137 Crores and 80 Lakhs)

You’re Missing Something

This is how the power of compounding works, but this calculation is very easy to do, and then easier to plan your goals accordingly. But wait,

The main part that is missing in this compounding work is PATIENCE. Yes, everyone will say they have patience, but very rare people actually have Patience.

Real Life Story

Let me share with you a story of one of my clients who met me in 2016, though he met me in 2016 he was investing in mutual funds and equity markets since 2005.

He used to share with me that, Gurpreet – I have understood one thing in this market: if you invest regularly for decades, you will generate handsome returns from this market because compounding plays its role in the long term.

Then, he said he wanted to Start SIP in Equity Mutual Funds for his son for the next 42 years, as his son just turned 18 and he added, “I don’t want him to withdraw these funds until my son is 60.”

Then he opened the SIP Calculator App in his Android Mobile and calculated the Value of Rs.10,000 SIP he started for his son in the next 42 years.

He said that if I keep investing these Rs.10,000 per month in equity mutual funds for the next 42 years my son will have approx Rs. 30 Crores @ 15% CAGR – After listening to this, even I was amazed to see his confidence and I thought this investor will definitely make it because he knows everything about compounding.

This whole scenario was of 2016, let’s fast forward this to 11th March 2020.

He called me and said, “Gurpreet do one thing.” I said what? to which he replied, “Shift all my equity funds to debt funds as the market has started falling, let’s save our portfolio now, we will put money when the market will fall more due to this COVID thing.”

This thing made me ask one question to him and all other investors who thought the same, Where did the calculator said you have to redeem when the market falls and put back when it falls more? while calculating your figures of Rs.30 Crores?

Conclusion

What I want to share with you is that, Stop using calculators to see how your wealth is compounding over years and what it will give you – those figures will remain on the calculator only if you keep timing the market, thinking which is the recent outperforming fund, which is a low-cost fund, whether you should go regular or direct and so on.

Thinking about all these factors will not let you have ONE SINGLE THING – That is PATIENCE, only PATIENCE will let you compound your money into exponential figures not thinking all day about saving small percentages whether into expenses or performance comparison of schemes.

We as Professionals also play a key role in just helping our investors stay patient to compound their wealth. This is even applicable for us that the scheme selection, market timing doesn’t have more than 5% relevance in overall wealth creation and financial goal achievement.

In the end, achieving your goals is more important, rather than cribbing that your friend might have Rs.20 Lakhs more than you because he is saving pennies or putting time in selecting the best funds or trying to time the market. Only time will tell who created how much wealth!

Have PATIENCE and COMPOUND!

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