By investing small amounts regularly, you can manage to accumulate a lot of wealth. For example, when an investment gives a 12 percent return, the investment can double in about six years, which is a 100 percent increase.
The key to building wealth gradually lies in what is known as ‘the magic of compounding’.
Stock advisors suggest that investors can grow wealth to achieve their financial goals by investing small amounts regularly through SIP (systematic investment plan). .
The magic of compounding, therefore, makes managing investments a simple matter. Legendary investor Warren Buffett once called investing a ‘simple game’ that financial advisors make it seem more complicated than it really is.
However, the proof of the pudding is in the eating. To see how this works, you can look at the performance of any successful strategy and estimate how your investment might grow over a period of time.
For example, Sundaram Multi Cap Fund has posted a compounded return of 15.29 percent over the past 10 years, according to (live) data provided by AMFI, on January 6, 2023.
Sundaram Multi Cap Fund
This funding was launched in October 2022 (regular) and in January 2013 (direct). Its main stockholders are RIL, SBI, ICICI Bank, HDFC Bank, Axis Bank, Infosys Bank, Hindustan Unilever and ICRA.
The fund is managed by Sudhir Kedia and Ratish B Varier, and the average assets under management (AUM) are ₹1,917 crore.
At a compound rate of 15.29 percent, if someone invests a small amount ₹12,000 per month for three years, it adds up ₹5,50,756 in contributions ₹4,32,000.
In five years, investment in ₹12,000 increased to ₹10,85,007 on investment alone ₹7,20,000.
|Age||Amount Deposited (Rs)||Amount collected (Rs)||Wealth Generation (Rs)||Increase (Rs)|
(According to CAGR of 15.29 percent as of 6 Jan 2023: AMFI data)
Similarly, in seven years – a constant investment of ₹12,000 would have been swollen ₹18,08,965 from his contribution of only 10,08,000.
And it works more magic in the mix. If the investor made regular investments ₹12,000 through EMI over 10 years – the corpus may have increased ₹34,04,287. but the total amount invested is nothing ₹14,40,000.
In addition, wealth growth tends to increase at the end of 10 years. For example, in the first three years, wealth growth is over ₹1.18 lakh, but in the last three years the wealth has increased ₹11.6 million.
In short, we can reiterate that the magic of compounding allows investors to build wealth over a period of time.
And with a small investment ₹12,000 in the fund scheme which gave a cumulative return of 15.29 per cent, could have accumulated more than ₹34 lakh in contribution ₹14.40 lakh only.
(Note: This story is for informational purposes only. Consult a SEBI registered investment advisor before taking any investment related decision.)
We explain what the annual growth rate is in this picture.
First published: 12 Jan 2023, 12:16 PM IST