Get rich quick: Unleash the magic of compounding now!

Many have heard about the power of compound interest and how it can help build wealth over long periods. But very few understand how truly magical compounding can be when given enough time to work. This article explains how even small savings can grow into large sums with the help of compound interest.

Understanding the magic of compounding

Compounding refers to the process where interest earned is added to the principal amount and earns interest in subsequent periods. This leads to earning interest on interest, accelerating growth. The longer the time period, the more profound the impact of compounding.

Let’s understand this with a simple example. Let’s assume you start an SIP of Rs. 5000 per month in a mutual fund that provides a conservative annual return of 10%. In the first year, your investment of Rs. 60,000 will earn a return of Rs. 6,000. In the second year, your investment amount will be Rs. 66,000 (Rs. 60,000 + Rs. 6,000 returns from year 1). The returns in the second year will be 10% of Rs. 66,000, which is Rs. 6,600. And this cycle of earning returns on returns will continue each year.

After 20 years, your monthly investment of just Rs. 5000 would have grown to Rs. 52.43 lakhs simply due to the magic of compounding! This growth would not have been possible without the returns generating more returns year after year. The longer the time period, the more potent this effect.

Tools to harness compounding

Now that you understand why time is so crucial for compounding to work, here are some straightforward tools you can leverage:

  • Systematic investment plans (SIPs) in mutual funds: An SIP allows for small but regular investments in mutual fund schemes. Most Indian households can easily invest Rs. 5,000-10,000 per month via SIPs. Over 15-20 years, even these small amounts can grow remarkably large through compounding returns.
  • Compound interest calculator: Online compound interest calculator make it easy to visualize the staggering impact of compounding over different time periods and interest rates. Play around with calculators from reputed platforms to understand how small tweaks in variables can translate to huge differences in the final value.

Best mutual funds for compounding

  • Equity mutual funds: These funds have strong potential to offer double-digit long-term returns through exposure to stock market growth. Some top-performing equity funds that harness the power of compounding include Nippon India Index Nifty 50 fund, Axis Bluechip Fund, UTI Nifty Index Fund, and Parag Parikh Long Term Equity Fund. 
  • Divide Savings Between Equities and Debt: Allocating 50-60% of savings to equities and the rest to safer debt funds ensures adequate participation in growth while managing risks. Both asset classes will compound wealth over 15-20 years to achieve sizeable targets.

Start early and stay invested

Time is the biggest friend of compounding. So, starting early, even with small amounts, is vital. Staying invested through market ups and downs allows you to benefit from rupee cost averaging and compounding throughout all stages of your financial life cycle.

Conclusion

Compound interest offers tremendous potential to build wealth over 15-20 years through regular modest investments. Indians must leverage best mutual funds, SIPs, and online tools to maximize compounding and work toward important life goals. Time, discipline, and a long-term view are your allies in the quest to unlock exponential wealth through the undeniably ‘magical’ power of compounding interest.


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