The power of compounding: what it means?
Aashish, a young professional and his father, an avid trader with Angel Broking are talking when Ashish asked what the power of compounding is all about. His father explains:
Through the power of compounding, a small amount of money can grow into a substantial sum over a period of time. The longer the timeframe, the greater the value. For example, in order to achieve your future financial goal you invest 1 lakh rupees per annum in a bank fixed deposit for 30 years at five point five percent interest (that is post tax effective rate). Your savings will grow to seventy six point four lakh
rupees which is two and a half times the amount you invested. Equities however have historically outperformed other asset classes yielding approximate returns of 16 percent over a longer period of time. If you invest the same amount for the same period in equities instead of a bank fixed deposit and assuming you get 14 percent interest, your savings will grow to four point one crore rupees which is more than thirteen and a half times the amount you invested this is the power of compounding. Thanks to his father, Ashish now understands the power of compounding.