Power of Compounding in One-time Investment: Rs 1,00,000 investment for 40 years vs Rs 3,00,000 for 30 years vs Rs 5,00,000 for 25 years; which can generate highest return?
Power of Compounding: Are you delaying your investment as you believe a small investment won't take you to a huge corpus? A delay may cost you dearly! In the realm of investment, it's not the amount; the duration may play a major role. A Rs 1 lakh investment can generate a corpus larger than a Rs 10 lakh investment. A Rs 5,000 monthly SIP can create a larger corpus than a corpus from a Rs 50,000 monthly SIP investment.
Power of Compounding: When should you start investing? What's the right age to start investing, or what's the right stage of your career when you should begin your investment? Are you delaying investing because you don't have a large amount to invest? These are some questions that strike our mind when we think about starting to invest. One problem with a lot of wannable investors is that they delay their investment journey, thinking it won't create a sizeable corpus as their investment amount is not large. But it has a flaw; a delay of just 5 years may reduce the corpus significantly. There is quite a possibility that an Rs 1 lakh investment can generate a larger corpus than what an Rs 10 lakh investment can create. Similarly, a Rs 5,000 monthly SIP investment can create a larger corpus than a corpus created from a Rs 50,000 monthly SIP investment. The condition is the investment duration in either case should be longer in small amount cases. If that's the condition, investors can get overwhelming results even from a small investment. See many such examples in this write-up. Also know which of them can create the largest corpus – Rs 1,00,000 for a one-time investment for 40 years vs Rs 3,00,000 for 30 years vs Rs 5,00,000 for 25 years!
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Rs 1 lakh investment vs Rs 10 lakh investment
In this example, see how a Rs 1 lakh one-time investment can generate a larger corpus than the fund created from a Rs 10 lakh investment.
If one investor invests Rs 1 lakh for 36 years and another investor invests Rs 10 lakh for 15 years, Rs 1 lakh can create a greater corpus than the one from Rs 10 lakh.
Rs 1 lakh investment vs Rs 10 lakh investment
In 36 years, estimated capital gains from a Rs 1 lakh investment will be Rs 58,13,557, and the estimated corpus will be Rs 59,13,557.
In 15 years, estimated capital gains from a Rs 10 lakh investment will be Rs 44,73,566, and the estimated corpus will be Rs 54,73,566.
Here, a Rs 1 lakh investment is creating capital gains of nearly Rs 14 lakh extra because of a long investment horizon.
Rs 3,000 SIP investment vs Rs 30,000 SIP investment
Here, A starts a Rs 3,000 monthly SIP investment, and B starts a Rs 30,000 monthly investment for the long term. A wants to invest for 40 years and B for 20 years.
See how, with an investment horizon twice that of B, A can create a larger corpus.
In 40 years, A will invest Rs 14,40,000, their estimated capital gains will be Rs 2,79,39,213, and the estimated corpus will be Rs 2,93,79,213.
Rs 3,000 SIP investment vs Rs 30,000 SIP investment
In 20 years, B will invest Rs 72,00,000, their estimated capital gains will be Rs 2,03,95,721, and the estimated corpus will be Rs 2,75,95,721.
Here, 2 striking things are- A's total investment is Rs 57,60,000 less than B's, while the estimated corpus generated is higher by Rs 75,43,492.
Rs 5 crore corpus from Rs 6,000 SIP vs Rs 60,000
Now, in the third condition, if one wants to create a Rs 5 crore corpus, see how they can create it with a Rs 6,000 monthly SIP investment with a lesser amount compared to how they can create it with a monthly SIP investment of Rs 60,000.
Rs 5 crore corpus from Rs 6,000 SIP vs Rs 60,000
If they start with a Rs 5,000 monthly SIP investment, it can be created in an estimated 39 years. Their total investment will be Rs 28,08,000, estimated capital gains will be Rs 4,95,86,488 and the estimated corpus will be Rs 5,23,94,488.
Calculations for story
Here, we will calculate which of the 3 amounts can create the largest corpus: a Rs 1,00,000 one-time investment for 40 years vs Rs 3,00,000 for 30 years vs Rs 5,00,000 for 25 years. The annualised return in each case will be 12 per cent.
Corpus from Rs 1,00,000 one-time investment for 40 years
In 40 years, a Rs 1 lakh one-time investment will generate estimated capital gains of Rs 92,05,097 and the estimated corpus of Rs 93,05,097.
Corpus from Rs 3,00,000 one-time investment for 30 years
In 30 years, a Rs 3 lakh one-time investment will generate estimated capital gains of Rs 86,87,977, and the estimated corpus of Rs 89,87,977.
Corpus from Rs 5,00,000 one-time investment for 25 years
In 24 years, a Rs 5 lakh one-time investment will generate estimated capital gains of Rs 80,00,032 and the estimated corpus of Rs 85,00,032.
Conclusion
In the examples above you can see that a Rs 1 lakh investment is generating extra capital gains of Rs 12,05,065 compared to gains generated from a Rs 5 lakh investment when the investment horizon is 15 years longer. This growth takes place because of the compound growth of investments.
By using the same logic, one can generate a larger corpus or may achieve it with a little investment if they stay in their investment for a long time.
Retirement planning from a small investment
Let's assume you want to create a corpus that is 100 times more than the investment amount. Your expectations of investment return is 12 per cent. Let's see in how many years it is possible.
If you have Rs 10 lakh for investing and want to create a Rs 10 crore corpus, let's see in how many years you may achieve it-
It can be achieved an estimated 41 years.
Retirement planning from a small investment
In 41 years, estimated capital gains will be Rs 10,32,17,086.89 and the estimated corpus will be Rs 10,42,17,086.89.
But if you get a 13 per cent annualised return, the same can be achieved in an estimated 38 years.
In 38 years, estimated capital gains will be Rs 10,29,87,431.78 and the estimated corpus will be Rs 10,39,87,431.78.