the initial investment sum plays an important role in the sum of
say you invest Rs. 10 lacs, assuming an investment return of 20%, you
Rs. 12 lacs in one year. The sum would diminish to Rs. 1.2 lacs if you
invested only Rs. 1 lac at the same rate of return. On an absolute
basis, the investor with more money to begin with seems to be much
with absolute profits of 2 lacs versus
0.2 lacs. So some people may have an illusion that investment only work
for people who invest large sums of money. But investors who take up a
consistent investment strategy with good, stable returns also stands to
over the longer term with the power of compounding at play.
if you invest a relatively smaller amount, you could make a very good
making use of the power of compounding. What you need to have on your
TIME; or simply to invest early. Let's illustrate how much Rs. 1 lac
at steady rates of return over different periods as shown in Table 1.
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
8.5% interest on the deposits. Banks Fixed Deposit (FD) interest rates
be volatile. Just a few months ago, banks were offering 10% interest
fixed deposit of 1 year term, but now they are offering around 8% for 1
returns get far better if the rate of return is at 10%. In 10 years,
investment will grow to Rs. 2,59,000 and to Rs. 17,45,000 in 30 years'
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
the span of 30 years. A great value investor like Warren Buffet
annualized returns of 20.3% in the past 43 years (Source: 2008 Warren
letter to shareholders of Berkshire Hathaway Inc.). With the power of
compounding, the investment grew tremendously to 256 times the original
in 30 years.
1: Investment Returns of Rs. 100,000 at Different Annualized Rates
figures rounded off to the
Source: iFast Compilations
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
are eligible for taxation if you redeem the fund units within 1 year
date of purchase, if you redeem the units after 1 year, all the gains
long as you invest early and pick the right
asset class or portfolio, even a decent annualized return of 15% would
you a long way. Investing for the long term also helps investors to
short-term volatility in equity markets. Long-term value investors are
likely to be scared off during volatile times as many ordinary stock
who are sensitive to market momentum would do.
additional to doing a lump sum investment for
the long term, investors may also choose to invest regularly by using
Investment Plans. This investment strategy is suitable for long-term
to make use of the power of compounding.