03 Feb Power of compounding in Mutual funds investing!
Answer this question.
Suppose you are being given an opportunity to travel to the moon and come back. To do this you have been allotted a Hi-tech Time travel machine whose initial speed is 10 km per week. Make a note, the speed of this machine will get double every week as you begin your journey towards the moon. Also, make a note the journey won’t be easy, there will be obstacles along the way.Now, My question to you is how much time would it take you to reach the surface of the moon and come back to earth?
Think about it, comon, this is just for fun. The distance between Earth & the Moon one way is approx. 3.6 lacs Km so the distance required to be covered back & forth is 7.2 lac km.
Here are your first 5 weeks’ distance-covered statistics
So now think about it. Keep an answer in your mind before we open the curtains.
Okay, here is the answer.
You will come back to Earth in less than 18 weeks, check out below.
Wow, isn't it amazing just less than 18 weeks?
Now here’s one more interesting thing. If you see it carefully in your distance covered chart. By the 10th week you had just covered 5000 odd kilometers, the bulk of your distance got covered in the last 8 weeks of your journey.
Why did that happen that way?
Remember we said the speed of machine will double every week, this doubling effect created a massive increase in the speed of your machine in the last leg of your travel,which made this impossible journey impossible in just 18 weeks.
What you saw above was an example of power of compounding or compound interest as commonly called.
Hypothetically speaking,Imagine had you stopped this journey in the 10th week, thinking of it as impossible task you would have missed a lifetime of an opportunity.
Wealth creation through mutual funds is yet another example of power of compounding, which many people keep missing. Let us see
Let’s assume you invest 35000 per month, and you do this for the next 20 years, your rate of returns we assume will keep coming at 12% CAGR* (Compounded annual growth rate) year on year
What do you think, how much will you make? Check it out
The first thing is you will make a lot of money, relatively better than any other investment tool.
The second thing to note, just like in the above example, your first 10 years of investment would generate a corpus of 82.5 lac rupees on your investment of 42 lacs (not bad at all) but in the next 10 years you will add a staggering 2.15 crores to your corpus on an additional investment of just 42 lacs , now this is again an exponential growth just like we saw in the case of our hypothetical time travel machine above.
Why do many mutual fund investors don’t take advantage of this power of compounding?
This takes time, wealth creation doesn’t happen in a couple of years as you saw in the table above. Mutual fund investments is a long term activity, the initial 5-7 years are not so great as the corpus is small, but as it get bigger the real power of compounding is witnessed.
Those who have patience can only make large wealth through it & we have seen in our experience many investors lack patience, they cannot stay invested for long periods of time. The one who does have seen the fruit in the past & will see in future as well.
Ending this, with a quote from world’s best investor, Warren buffet who made bulk of his wealth through investing, when he was asked about his success, this was his reply.
