Formula for compound interest (A) =P(1+r/n)nt
Where in,
P =
Principle
r = Rate of
return
n = number of times interest applied per time period
t = number of time periods elapsed
There are three component in the
formula principle
Principle= Initial
investment made
Rate of
return = Expected rate of return on investment
Time= Time
given for the investment to compound
The above given is just a general description
which is usually thought in school, but just forgotten about its original
powers & use.
Below are the famous quotes on
compounding said by great men:-
"Compound interest is the eighth wonder of the world. He who understands it, earns it.....he who doesn't....pays it"-Albert Einstein
One
of the tool he used is compound interest .He turned few hundred dollars into hundreds
of billions of dollars. When he was started investing through BERKSHIRE HATHAWAY
in the year 1965 share price was approx. $7.5 dollars to now of more than
$200000 a CAGR of 17% approx. each year. The magic of compounding was on his
side for 50+ years. So the most important component in the formula actually is
the time because the principle amount of investment is limited with all & rate
of return cannot be fixed by anyone what so ever.
COMPOUNDING & INVESTING IN STOCK
MARKET
Stock Market is actually a compounding
machine. For eg. When the Sensex came into existence the index was at 100
points & now it is at 36000+ points approx. It is approximately doubling
every 4 years from its inception i.e.15% CAGR approx.
Sensex is just a composition of top 30
companies, where the share of this companies are listed. A share is just a piece of business, when the
revenue, profit, margins, etc. increases over a period of time along with the
share price increases. If one could find a company which can give 10% return
for next 20 years & if he just invest $100000 in it at the end of the 20
years period it will be worth $672750 without any efforts, just sitting idle.
VEHICLES FOR COMPOUNDING
(MUTUAL
FUNDS, INDEX FUNDS, INDIVIDUAL STOCKS)
With
INDIVIDUAL STOCK is already explained above
Investing through SIP (Systematic
Investment Payment)
If one
invested only $1000 for next 20 years per month at 10% return the amount at the
end of the 20 years period will be $7,73,025 but we just add 10 years more it
will come to $2,299,163 that’s the power of compounding. But again the most
important thing is time, so start as early as possible.
One can
easily invest a few bucks each month and retire with decent amount of money.
One of the simplest way to do so is via SIP in a mutual fund or an index fund;
this option is good for people who don’t want to study market or business &
who don’t have the psychological capacity to bare the market fluctuations.
Hdfc compound
interest calculator: https://www.hdfclife.com/financial-tools-calculators/compound-interest-calculator
COMPOUNDING & TAXATION
There is also tax benefit along with compounding
in stock market which means you don’t need to pay tax until you sale a stock
which actually means you are borrowing money from government for free. So one
should stay invested for long term in a stock to take advantage of it.
THE GREATEST STORY OF POWER OF
COMPOUNDING
This story dates back to more than 220
years ago & involves one of the most fascinating person ever lived BENJAMIN
FRANKLIN, he was an inventor, scientist, civic activist, diplomat, etc. He also
was the FOUNDING FATHER OF AMERICA.
The Power Of Compounding with Benjamin Franklin
He donated $1000 for 100 years &
200 years to his native hometown BOSTON & his adopted hometown PHILADELPHIA
each with the condition that money to loaned @ 5% to young craftsman’s with
following condition that:-
1. He should
be under the age of 25 years
2. Who is married?
3. He have
completed his apprenticeship
4. Can
obtain two signore’s.
After 100 years both the town can use 75%
of the funds for public works & continue to for more 100 years at the end
each city would get 25% of the funds & the respective state will get the rest.
If they would have done so the amount available with city would have been $20
million at the end of 200 years . But due to wrong investment, political
issues, etc .they actually were just left with 5 million with BOSTON & 2
million with PHILADELPHIA. YOU can see the MAGIC OF COMPOUNDING from this example.
THE MOST IMPORTANT COMPONENT IN THE EXAMPLE WAS TIME, SO ONE SHOULD START INVESTING AS EARLY AS POSSIBLE.
THE MAGIC OF COMPOUNDING IS EXPLAINED IN A
BOOK
THE
COMPOUND EFFECT -BY
DARREN HARDY
(A must read
to understand how compounding work in real world and it benefits) AVAILABLE HERE: https://amzn.to/2DegDpf
OPEN FREE UPTOX DEMAT ACCOUNT:https://bv7np.app.goo.gl/6v7y138MWRohEgKc9
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