When it comes to investing, there are several things that are not in our control as investors. The economic conditions, events triggering changes in the market, how the market reacts to such conditions and hence the returns in the near term, and so on.

But there are still some things that we (the investors) can influence.

1.           The amount we can put into investments

2.           The time period of our investments

In the Compound Interest formulae, out of three factors namely, invested amount, interest (returns), and the number of years invested, we focus more on the returns, while the other two also influence the overall growth of the investment fund.

Here is an illustration where Amit and Ajay begin investing Rs.1 lakh each year (about Rs.8000 per month) into a well-researched product. As soon as he received his raise, Ajay made a conscious decision to raise his investments by 10% annually.  Both of them continued to invest for 20 years without redeeming at any time during the period.

Here are some observations from the 20 years of their investment journey.

At the end of the 20 years period, Ajay had made more than 100% of what Amit made!

Amounts highlighted in ‘Blue’ are where additional 5 lakhs were achieved. During his fourth year, Amit earned his first “5 Lakhs.” His subsequent “5 Lakhs” was made in under three years. He started making “5 Lakhs” every year after 13 years of consistent investments. This is the magic of compounding!

Ajay achieved the same even sooner than Amit.

After all, we are making an investment toward our goal, and achieving that goal is our first priority. Hence, it is prudent to take advantage of the factors we have under our control rather than solely relying on external factors to build investments.

#Consistency #Compounding #Investment #planning

Anand and Amit joined the company shortly after graduating from college.

Anand’s father had asked him to contribute an extra Rs.8000 per month (~Rs.1 Lakh per annum)to his Provident Fund. He agreed because he was only paying a portion of his salary and getting to spend the rest. Amit had not considered this addition at the time.

Anand took out a loan a few years later and planned to use the Rs.8000 to repay his loan. So, he couldn’t contribute further. By then his corpus in the PF had grown considerably.

This is when Amit realised the power of a meagre Rs.8000 savings. He later began investing an additional Rs.8000 in the provident fund.

They have both invested around 10 lakhs in their twenty years of corporate experience, but their returns are not the same.

The rate of interest ‘r’ and the time in years ‘n’ are two important factors that influence the compounding effect of investment. While we are focused on the returns, we often overlook the importance of time.

The longer the duration of the investment, the greater the return.

The Illustration assumes an 8% interest rate. Person 1 – Anand and Person 2- Amit

#compounding #investment #financialplanning