What Is Power Of Compounding

The power of compounding: What it means

Aashish, a young professional, asks his father, an avid trader with Angel Broking, 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. 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 5.5% interest rate (post-tax effective rate), your savings will grow to 76.4 lakh rupees, which is two and a half times the amount you invested.

Equities, however, have historically outperformed other asset classes. They yield approximate returns of 16 per cent over a longer period. If you invest the same amount for the same period in equities rather than a bank fixed deposit (assuming you get 14 per cent interest), your savings will grow to 4.1 crore rupees. This value is more than thirteen and a half times the amount you invested. Thanks to his father, Ashish now understands the power of compounding.