In this article we are going to tell you how the power of compounding affects your investment for long term, To understand the power of compounding we are going to tell you a story of three friends.
Once in a town there was three friends Amar , Akbar and Anthony. As they belongs to same area and they were neighbor, they completed their education from same school and colleges then they got job in different sector.
They got their job at the age of 25, after few years at the age of 30 Amar decided to save some amount for future and he discussed with their friends but he din’t want to take any risk that’s why he found bank fixed deposit is the best option and he invested around 2 Lakhs in bank deposit with the interest rate of 7% yearly.
Akbar was extravagant, He want to own a luxurious life, so spends his money in pub , alcohols, discos and on luxurious vehicle, so he could not save any money.
The third friend Anthony have family burden, he was the single earning person in his family, his father was ill , a small brother and sister and their education so his most of the money was spent in the maintenance of family.
Power of Compounding
But from somewhere he found some information about mutual fund and with the help of a financial expert he got full details, so he tried to invest in stock market via mutual fund, but he had the problem that he didn’t have a large amount to invest .
Then he heard about SIP (Systematic Planning Investment), that he can invest some money on regular basis so he decided to invest 5000 per month from his salary.
Anthony was aware about Amar that he have invested in bank as FD, so he told his next friend Akbar to save some money for future but Akbar replied when he will get a large money then he will invest one time. After some time they got married and then children, off course their salary also increased , Anthony want to invest some more money but due to family and children he could not increase his investment , but somehow he regularly invested 5000 per month in SIP.
Now after 15 years Amar have some good amount about 9 Lakh with interest, but he didn’t want to withdraw it until 30 years. On the other hand Anthony’s invested portfolio reaches to about 25 Lakhs with a average return of 12% , but he didn’t stopped his SIP, he thought to invest for some more time. At same time Akbar didn’t have any major saving so he thought to invest the double amount of Anthony to beat him, so he starts to invest 10000 per month via SIP.
Now this is the turning point, after 15 years they comes to at the age of 60 years, Now Amar want a retirement so he withdraw this money from bank, and after 30 years of fixed deposit in bank with a return of 7% his total investment value is around 28.4 Lakhs. On the other hand Anthony ‘s Investment value increases to around 1.6 crore with an average ruturn of 12% via mutual fund. Now we come to third friend Akbar and his investment value increases to around 50 Lakhs.
So here you can check a big differences in their investment amount and on their return. So you must invest and the main point is where you are investing that is very important. A small and regular investment could create a large wealth for you, so decision is totally yours.
Disclaimer – Here we are not suggesting you to directly go for investment, we have written this article for educational purpose, before taking any decision must take the advice of your financial planner or adviser.
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