You Know the 7 Wonders of the World. Here is Number 8.

You Know the 7 Wonders of the World. Here is Number 8.

Let’s play a game. You are given two (hypothetical) investment choices and asked to choose any one. In the 1st choice, you invest Rs.1 today and get Rs.1 crore after one month. In the 2nd choice, you invest Rs.1 today and the amount doubles daily till the 30th day. This means it becomes Rs.2 on the 2nd day, Rs.4 on the 3rd day, Rs.8 on day 4 and so on till the 30th day. So, you will get the amount accumulated on the 30th day as per this calculation.

Power of Compounding

Many would feel that it is a no brainer and would choose the 1st option because Rs.1 crore is a very big amount especially when you are investing just Rs.1. Few others would think that there is some catch and do the actual calculations to get it right. But they realise that till day 15, the accumulated amount is only Rs.16,384 and leave the calculation half way thinking that the final amount would be far lower than Rs.1 crore. So it is OPTION 1 for most.

Without raising the curiosity any further, here is the correct option. It is OPTION 2. Any guesses on the final accumulated amount? It is a whopping Rs.53,68,70,912/- or almost Rs.54 crore. Hard to believe!! Just try and calculate this in excel. Imagine if the month had 31 days, you get an eye-popping Rs.107 crore (nowhere near the Rs.1 crore in Option 1).

Guessing the right option was a bit tricky because the amount accumulated till day 15 was just Rs.16,384/- and most of the accumulation happened in the next 15 days. This is called the POWER OF COMPOUNDING, rightly called the 8th wonder of the world by none other than Albert Einstein, the Nobel winning scientist. Power of compounding works on 3 aspects – how much you invest, for how long you invest and the returns you expect.

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So, you too can think about accumulating a large investment corpus if you understand these 3 aspects. Say you want to accumulate a corpus of Rs.10 crore in your working career of 35 years. You can do this by either saving more in low returns/ less risky instruments or saving less in potentially high returns/ relatively riskier investment products over the 35 year period. The table below provides the amount to be saved in a normal and 10% p.a. step up SIP to accumulate Rs.10 crore in 35 years.

Estimated Rate of ReturnAmount to save monthly
(Normal SIP) Rs.
Amount to save monthly
(10% Step-Up SIP) Rs.
Final Amount after 35 years
8%43,30611,450Rs.10 crore
12%15,3965,600Rs.10 crore
15%6,7003,000Rs.10 crore

Historically it has been seen that equity mutual funds have the potential to provide higher returns above the inflation rate over the long term. For example, the S&P BSE Sensex has given 15% annualised returns over 35 years from September 1983 to September 2018. If the same is extended over the next 35 years, you would need to invest Rs.6700 per month in a normal SIP and Rs.3000 in a 10% step-up SIP to accumulate Rs.10 crore. So, make the right investment choice basis your risk appetite and enjoy the power of compounding!

Note: All calculations are only for illustrative purposes and are based on mathematical formulas. It should not be construed as investment advice and there is no assurance or guarantee of returns. Investors should consult their investment advisor prior to arriving at any investment decision.

An investor education and awareness initiative by Franklin Templeton Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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