Most of us studied compound interest in our primary education and believe that we understand it. But as investors, our behavior indicates otherwise. We hold the investments for a short period and given the first sign of any volatility, press the exit button. Many also exit from the funds if they feel that the market is currently high and exiting would be a prudent strategy. Their logic is to reenter after correction. But market simply refuses to behave as per our calculations or for that matter even so-called expert’s. These timing stunts deprives investors the huge power of compounding and they miss the wealth creation opportunity. So, what to do? Stay invested come what may! Hold your investments as if you owned them forever.
Whether you are investing a huge amount or a minuscule amount regularly, the power of compounding is always at your service irrespective of quantum of investments. In fact, serious wealth creation requires long enough time instead of huge capital.
Let’s consider following examples-
An SIP of Rs 5000 per month for 30 years in equity mutual funds will result is Rs 1.62 Crores in 30 years, Rs 2.90 Crores in 35 years and Rs 5.15 Crores in 40 years. Assumed growth rate is 12% per annum. Look at the rate of growth in later years. Once the base is there, your wealth compounds by leaps and bounds.
Now, let’s make it little more interesting- Suppose you keep on increasing your SIPs @5% per annum, then the corpus would become Rs 2.61 Crores in 30 years, Rs 4.93 Crores in 35 years and Rs 9.21 Crores in 40 Years.
Who so ever is reading this article can definitely invest Rs 5000 or more per month. I think investment is not a challenge but the holding period is. Most of us could not sustain this patience or discipline. But what if we consider these investments as Warren Buffet investments. Warren Buffet is known for being very lazy when it comes to selling his investments. He holds his shares for 30-35 years and above. This is the lazy elegance you need if you truly want to build a huge portfolio.
He holds his shares for 30-35 years and above. This is the lazy elegance you need if you truly want to build a huge portfolio.
A person who is let’s say 20 can hope to live till 80-85 years and more. If she starts investments then even at the age of 60, she would further have around 20-25 years and possibly more to enjoy the financial freedom years. In her earning years, she would do lot more things, but only if continues to invest and hold her investments, she would be able to enjoy her financial freedom and possibly a great wisdom to pass it on to other generations.
And what if you are already 40 or even 50? Even then, you still have around 30-40 years and more till your life expectancy. So even you have a great deal of time left for magic of compounding to work for you. Moreover, you can invest higher amount to make up for the lost years.
Stop too much thinking and start your SIP now. And once you do, forget about exiting whether the stock market booms or busts.
Manoj Pandey
CFP
Mainstream Investments Services Pvt Ltd.
