Einstein said the power of compounding is the eighth wonder of the world. One, who understands it, earns it and the one who does not, pays it. Understanding power of compounding is very important to know how much difference of 2% in return can affect your financial health.
If you are given the choice of selecting one option, which one will you select ? (1) Starting with one paisa, your money will be doubled next day and doubling wil l continue till next 30 days OR (2) You will get fixed Amount of Rs. 1,00,000 for the next 30 days. Which option is better? Why?
If you invest Rs. 10 lakh to – day for next 15 years , it will be Rs. 32 lakh if it grows @ 8 % p.a . ( For 30 yrs, it would be Rs. 1.06 crores ), it will be Rs. 42 lakh if it grows @ 10 % p.a. (For 30 yrs, it would be Rs. 1.75 crores) and Rs . 55 lakh if it grows @ 12 % p.a . ( For 30 yrs, it would be Rs. 3 crores ) . Difference of only 2% can affect your pocket heavily!! Isn’t it?
It is really surprising that many investors do not understanding power of compounding in equity related mutual funds and are “ investing ” in life insurance policy to gift someone near and dear to them for a longer duration !! Grandfather gifts life insurance policy or Fixed Deposit to his grandson for “Wealth Creation ”!! Many investors open PPF (Public Provident Fund) Account for “ Wealth Creation” without knowing that interest rate is not fixed but declining in India!! How a life insurance policy and PPF can create wealth? Well, even if you want to go for such tradi ti onal instrument s , you cannot ignore difference in return shown above!! Just imagine how much your pocket is affected by 2% difference which seems very lesser percentage!!
Pl. notes that I am sending this write up to all my clients across the globe using mass media communication technology. Incase these comments are not applicable/acceptable, you may please ignore the same.
Thanking You,
DS Vayeda
