Power of Compounding in One-time Investment: Rs 2,50,000 investment for 30 years vs Rs 12,00,000 for 16 years vs Rs 15,00,000 for 14 years; which can create largest corpus?
Power of Compounding in One-time Investment: Do you think you can't achieve big dreams with a small amount of investment? Do you think your Rs 2 lakh one-time investment can't generate a larger fund than what a Rs 20 lakh lump sum deposit can create? Do you think it is impossible to achieve a return 100X more than your initial investment in a mutual fund scheme? Let's rethink and read!
Power of Compounding in One-time Investment: Has a small amount of investment stopped you from investing? Have you been waiting for years to reach your income at a point before you start your investment? Do you think compounding appears to be attractive in examples and hard to achieve in reality? Do you think a Rs 3 crore corpus can't be created from a Rs 3 lakh investment? Do you think creating a retirement corpus worth crores from meagre earnings is insurmountable? Let's read this article. It may shake many of your beliefs, highlighting the true power of compounding. Also know which of the 3 one-time investments can create the largest corpus – Rs 2.50 lakh for 30 years, Rs 12 lakh for 16 years, or Rs 15 lakh for 19 years!
Photos: Unsplash/Pixabay/Pexels
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What's power of compounding?
The power of compounding signifies the compound growth of an investment, where an investor gets return on return. Due to the snowball effect, the corpus grows faster. In the short term, the results may not be attractive.
What's power of compounding?
But in the long run, results can be surprising. Five years of extra investment may literally double your corpus. A 2 per cent extra return can increase your corpus significantly.
Value of 5 years in compound growth
Let's assume an investor has Rs 10 lakh to invest in a mutual fund scheme where they expect an annualised return of 12 per cent. Let's see the results they can get in 25, 30, and 35 years.
In 25 years, estimated capital gains will be Rs 1,60,00,064, and the estimated corpus will be Rs 1,70,00,064.
Value of 5 years in compound growth
In 30 years, estimated capital gains will be Rs 2,89,59,922, and the estimated corpus will be Rs 2,99,59,922.
In 35 years, estimated capital gains will be Rs 5,17,99,620, and the estimated corpus will be Rs 5,27,99,620.
Every 5 years, the corpus is growing faster because of compound growth!
Impact of 2% extra return
Now, let's see how a 2 per cent extra annualised return can help grow a corpus exponentially in the long run.
If one invests Rs 5 lakh in 2 schemes where the annualised return is 12 per cent and 14 per cent. Let's see the corpuses that can be created in 30 and 35 years.
At a 12 per cent annualised return, estimated capital gains in 30 years will be Rs 1,44,79,961, and the estimated corpus will be Rs 1,49,79,961.
At a 14 per cent annualised return, estimated capital gains in 30 years will be Rs 2,49,75,079, and the estimated corpus will be Rs 2,54,75,079.
Impact of 2% extra return
At a 12 per cent annualised return, estimated capital gains in 35 years will be Rs 2,58,99,810, and the estimated corpus will be Rs 2,63,99,810.
At a 14 per cent annualised return, estimated capital gains in 35 years will be Rs 4,85,50,089, and the estimated corpus will be Rs 4,90,50,089.
Calculations for story
For our story, we will calculate which of the 3 investments can give the highest capital gains- Rs 2.50 lakh for 30 years vs Rs 12 lakh for 16 years vs Rs 15 lakh for 14 years – which can give the highest return. The rate of annualised return in each case will be 12 per cent.
Return from Rs 2,50,000 investment in 30 years
Estimated capital gains in 30 years will be Rs 72,39,981, while estimated capital gains will be Rs 74,89,981.
Return from Rs 12,00,000 investment in 16 years
Estimated capital gains in 30 years will be Rs 61,56,472, while estimated capital gains will be Rs 73,56,472.
Return from Rs 15,00,000 investment in 14 years
Estimated capital gains in 30 years will be Rs 58,30,668, while estimated capital gains will be Rs 73,30,668.
Conclusion
A Rs 2,50,000 one-time investment is generating the highest capital gains of all 3 because it is getting 14 years of extra compounding compared to the Rs 12,00,000 investment and 16 years of extra compounding compared to the Rs 15,00,000 investment.