The magic of compounding – SIP

Do you know the meaning of compounding? If not, then you need not worry as we are here to explain to you each and every important detail about this topic and how you can use it in your favour.

Think of a snowball, as it descends, its volume does not stop growing. That’s what will happen to your money if you invest it in any investment working on compounding factor.

We tend to think that the success of our investments depends on a single factor: profitability. But we forget the other two great factors: perseverance and patience.

Let’s take an example to make it clearer for you, if we invest our savings continuously (with perseverance) in a fund that does not offer a very high return, we will see that, after a long period of time, (patience), the accumulated capital will reach unsuspected heights.

The key for a long-term investment to give us optimal results is in this simple equation:

(Consistency + Patience) x N, where N is the number of years in which investment is made.

In short-term investments, it looks like the extra profit gained because of compounding is little, but the power of compound interest actually makes a big difference in long-term investments. The following two points are the keys to obtaining a compound interest effect when investing.

• Make a long-term investment (start from a young age)
• Reinvest dividends

Make a long-term investment

The compound interest effect becomes greater as time goes by. Therefore, it is better to invest for as long as possible to take advantage of the compound interest effect. If you start investing in your 20s, you can invest for a long time and will have much better returns!

Reinvest dividends

It is more effective to reinvest to obtain the compound interest effect than to use the profit or interest earned as extra income for your own entertainment.

Instead of doing this on your own, you should opt for SIPs that will reinvest your profits automatically in the initial investment amount and will help you obtain a greater sum of returns.

Magic of Compounding

When you consistently invest for a long period of time, the interest earned is reinvested and you earn returns on the collective amount.

But you need to follow the three thumb rules:

1. Start Investing Early
2. Keep investing regularly
3. Stay invested irrespective of market ups and downs

One way to achieve this power of compounding is through SIP.

Let’s take an example of three friends A, B & C investing the same monthly amount say Rs. 5000/- per month for different time period say A invested Rs. 5000/- per month for 10 years, B invested Rs. 5000/- per month for 20 years and C invested Rs. 5000/- per month for say 25 years, assuming an average return of 15% per year (T&C apply).

So, the future value of the invested amount for A would be tentative Rs. 13,93,286/-, Rs. 75,79,775/- for friend B and Rs. 1,64,20,369/- for friend C.

This is the magic of compounding and investing with patience.

Wouldn’t you love to be one of those people who invest smaller amounts of money each month and get a huge amount at the end of the investment period? Definitely, you would! So, contact the team of RKFS and start investing through SIPs from today.