Mar 14, 2009

The Miracle of Compounding Returns

Some of the greatest minds in the world have marvelled over a simple, but extraordinary forceful concept - the power of compounding. Einstein called it "the greatest mathematical discovery of all time" and "the eigth wonder of the world." The economist John Maynard Keynes described the "awesome power of compounded interest".

The key to this concept is the way in which, given enough time, even apparently trivial amounts of money can turn into sizeable sums. In other words, the longer you invest for, the more you benefit from the "snowballing" effect of achieving growth not only on the original amount you invested but also on all the growth it has achieved in earlier years.

Lets quote an example which will show how much growth you might achieve with a monthly investment over 10, 20 and 30 years. For example, if you invest Rs.1000 a month in a fund that grows by 8% on a monthly compunding basis you will have Rs. 184,166 after 10 years. The benefit of Compounding is evident when you look at the returns over a period of 30 years - they are far more than eight times the value of a 10-year investment. In fact, the final value is nearly Rs. 15,00,000.

The powerful effect of compounding is another inportant reason why it actually makes sense to maintain a long term strategy, rather than changing your investments in response to the short term Market Movements.

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