Clearly, the initial investment sum plays an important role in the sum of returns. Let's say you invest Rs. 10 lacs, assuming an investment return of 20%, you would get Rs. 12 lacs in one year. The sum would diminish to Rs. 1.2 lacs if you had invested only Rs. 1 lac at the same rate of return. On an absolute amount basis, the investor with more money to begin with seems to be much better off with absolute profits of  2 lacs versus 0.2 lacs. So some people may have an illusion that investment only work well for people who invest large sums of money. But investors who take up a consistent investment strategy with good, stable returns also stands to benefit over the longer term with the power of compounding at play.

Even if you invest a relatively smaller amount, you could make a very good return by making use of the power of compounding. What you need to have on your side is TIME; or simply to invest early. Let's illustrate how much Rs. 1 lac would grow at steady rates of return over different periods as shown in Table 1.

Assuming a long term rate of 8% per annum, the initial amount of Rs. 1 lac would grow to Rs. 2.16 lacs in 10 years, and Rs. 10 lacs in 30 years' time. Public Provident Fund (PPF) currently offers about 8.5% interest on the deposits. Banks Fixed Deposit (FD) interest rates tend to be volatile. Just a few months ago, banks were offering 10% interest rates for fixed deposit of 1 year term, but now they are offering around 8% for 1 year deposits.

The returns get far better if the rate of return is at 10%. In 10 years, the investment will grow to Rs. 2,59,000 and to Rs. 17,45,000 in 30 years' time. You may wonder, "What if I am good at building a diversified equity portfolio and I invest early?" Let's assume an annualized return of 15% - in 10-year's time you would have made Rs. 4,04,000  which is about 4 times of the original investment amount. The sum balloons to almost 66 times the original amount in the span of 30 years. A great value investor like Warren Buffet generated annualized returns of 20.3% in the past 43 years (Source: 2008 Warren Buffet’s letter to shareholders of Berkshire Hathaway Inc.). With the power of compounding, the investment grew tremendously to 256 times the original amount in 30 years.

The table above illustrates that fixed deposit may look safe but would entail an “opportunity cost" of giving up investment. The interest income from the FD is taxed irrespective of the tenure whereas profits from sale of debt and equity funds are eligible for taxation if you redeem the fund units within 1 year from the date of purchase, if you redeem the units after 1 year, all the gains are tax free.

 As long as you invest early and pick the right asset class or portfolio, even a decent annualized return of 15% would bring you a long way. Investing for the long term also helps investors to tide over short-term volatility in equity markets. Long-term value investors are less likely to be scared off during volatile times as many ordinary stock investors who are sensitive to market momentum would do.