Saturday, October 7, 2006

Power of compounding

Einstein called compounding to be the eigth wonder of the world. It's powerful and astounding. And once you have understood compounding you can easily claim to be a wise investor! Because after seeing the power of compounding, you will start as soon as possible, stay invested for the longest time possible and invest regularly.

Let's look at an example given in this table. It teaches about finance and the power of compounding. The figures are based on an assumed annual rate of return of 10 percent, with no withdrawals and no taxes. Whether these conditions are attainable or desirable is beside the point. This table merely illustrates a principal that's based purely on mathematics.

Another example illustrates the power of compounding by way of comparison between a savings account and a Mutual Fund. Illuminating indeed.

Starting with a small Rs 1000 and by investing Rs 1000 every month compounded at 10% amounts to Rs 78171 after 5 years. In 10 years it more than doubles to Rs 202457. The figures at the end of 15, 20, 25, 30 40, 50 years are Rs 402621, 724986, 1244159, 2080292, 5595607, 1,47,13,428!! Do yr own toggling here

Easier said than done,eh?
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