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POSTED BY ON September 25, 2010 6:52 pm COMMENTS (7)
Can someone explain how the power of compounding helps, with an example, in the long term i.e around 20 or 25 years by investing in Equity Mutual Funds, i have read a lot but cant get how my investment will grow
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Let me help you with how to do the actual calculation in a minute:
Lets say your current investment = Present Value (PV) = 0
Assumed rate of return annually ‘rate’ = 12%
If annual contribution use this value. If monthly contribution use 12%/12=> rate = 1% for each period
nper = number of periods. For 20 years it is 240 period
pmt = contribution each period = assumed as 25000. Enter this as -25000 (Cash outflow is negative. If PV)
type = 1 if contributions start at begining of month else type = 0
Put this formula for Future Value in Exce.
=FV(1%,240,-25000,0,1)
Thats all!!
The terminal value is a whopping 24,978,697.98 => 2.5 crores
Compounding is called the 8th Wonder of the World by none other than Albert Einstein.
Read more about the same …http://goodfundsadvisor.blogspot.in/2010/03/use-8th-wonder-of-world.html
As an illustration, if someone invests Rs. 1 lac for 30 years at 8% per annum return, it will grow to become 10 lacs. Same Rs, 1 lac will grow to 30 lacs at 12% per annum return. Real fun begins at higher rate of compunding. Rs, 1 lac at 27% per annum return becomes 13 crore in 30 years and at 36% per annum, same 1 lac becomes 101 crore in 30 years.
This is the reason that for long time horizon, equity is prefered asset class as it allows higher rate of compunding.
Amar,
strange you dont know thepower of Compounding this is the very basic rule of Math.
by giving the Example I will tell u
if someone invest in any equity div. fund of Rs 5000 Per Month for 20 Yrs @15% expected return
then his investment Amount would be Rs.1200000 & Value of that amount would be Rs.74,86,197
in the other case if somebody invest for 25 years then difference of Investment amount would be just Rs.30000 & the Magic value will be after 25 year Rs.1,62,17,684
this is the value of power of compounding
plz send me ur E-mail id i will send u the good presentation of that
चक्रवर्ती ब्याज नियम(Power of Compounding) कहते हैं जिसको कि हमने स्कूल में पढ़ा है परन्तु कभी अपने जीवन में लागू नहीं किया . स्कूल में इस फार्मूले को रट कर पास तो हो गये परन्तु यदि हम इसे अपने जीवन में उपयोग करेंगे तो Financial Freedom प्राप्त करेंगे.
i know compounding but i wanted to know how it works in a SIP, its not a big deal to calculate amount on compound interest. u are an expert and i read your blog pretty regularly but all i just wanted to knew is if i Invested 100000 in a fund with NAV 120, how it will grow what wil be the future nav year by year.n Thanks a lot for the reply i m financially and educationally illeterate
Hmmm. Just play with calculator given on following link & that will give you some idea. Basically, it means, getting interest on interest portion also, year after year.
http://www.investmentkit.com/mutualfunds/index.shtml
Hope it will help you.
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