A Secret Sauce to Multiply Your Money for young investor

This is the story of 2 different young investors.

Story of Achint and My Cousin’s Sister:

• Achint’s Journey:
  • Starting Age: 23 years old.
  • Education: Reputed B School, Master’s in Finance.
  • Investment: ₹3,000 per month.
  • Investment Duration: From age 23 to 58 (35 years or 420 months).
  • Interest Rate: 11.5% per annum.
  • Final Amount: ₹1.68 Crores.
• My Cousin’s Sister’s Journey:
  • Starting Age: 30 years old.
  • Investment: ₹3,000 per month.
  • Investment Duration: From age 30 to 58 (28 years or 336 months).
  • Interest Rate: 6.5% per annum (through recurring deposits).
  • Final Amount: ₹28.47 Lakhs.

 The Staggering Difference: Achint accumulated significantly more wealth than my cousin’s sister. The difference is ₹1.39 Crores (₹1.68 Crores – ₹28.47 Lakhs).

 Key Takeaway: The earlier you start investing, the more wealth you can accumulate. This is due to the power of compounding, which allows your money to grow exponentially over time.

Now lets understand why this happened or I should say let’s understand Compounding:

What is Compounding? Compounding is a powerful financial principle where the interest you earn on your initial investment also earns interest over time. This creates a multiplier effect, leading to exponential growth of your investment.

Example of Compounding:

• Interest Rate: 6.5% per annum (typical for recurring deposits).
• Investment: ₹3,000 per month.
• Duration: 20 years.
• Final Amount: ₹14.71 Lakhs.
• Higher Interest Rate Example:
  • Interest Rate: 11.5% per annum (typical for a good diversified mutual fund).
  • Investment: ₹3,000 per month.
  • Duration: 20 years.
  • Final Amount: ₹27.75 Lakhs.

Impact of Interest Rate: A 5% difference in the interest rate can result in a difference of ₹13.04 Lakhs over 20 years.

Now understand the long-term investment strategy:

How Compounding Works in Mutual Funds: When you invest in a mutual fund, compounding allows you to earn interest on both your principal and the returns you re-invest. This means your returns generate additional returns, leading to faster growth of your investment.

Example: By re-investing your earnings (interest or dividends), you buy more units of the mutual fund. These additional units also earn returns, further increasing your investment’s value over time.

Start Early and Invest Wisely: To harness the power of compounding, start saving and investing as early as possible. The sooner you begin, the more time your money has to grow, leading to greater wealth accumulation in the long run.

So, act Smart and Start Early.