This is one of the queries I recently got at one of my workshops. Obviously, this did not have a straight answer and hence I told him I shall revert by email later. By instinct, I felt it is very much possible. I sat down and wrote this:
Yes, it is very much possible and for this to happen you may take the help of COMPOUNDING.
The one proven and easily implementable method of wealth creation is compounding. Compounding is very powerful and unfortunately, many of us underestimate its utility. Compounding happens when you invest your money and the return it earns is reinvested back. That literally means you invest and do not take any returns till the last.
Compounding sounds like a mathematical word; but at the root, it is just the way we observe many natural phenomena. Whether its population of the country or rise in prices, change happens as a fraction of the current value. If India’s population is growing at 2%, the absolute numbers are growing faster and faster, since the base is increasing. This is the crux of compounding.
In the world of finance, to make understanding uniform, we take compounding on an annual basis. If numbers are expressed with any other time frame, we simply convert that into an ‘equivalent’ annual number.
You may still have one more question. Where to invest? Compounding itself is a powerful thing irrespective of the product you invest in. But one thing you always want to do is preserve the values of money i.e maintain the purchasing power.
For that to happen you may have to choose products that can beat inflation. SIP in a large-cap diversified fund will do the job for you.
If one had invested Rs 15,000 say in HDFC Top 200 from Jan 2003 to Dec 2012 he would have had Rs 55 lacs today .i.e. 21.4% p.a. It is obvious that past results may not assure future returns, but if Indian GDP grows at 8-9% in the next decade, you may see SIP giving similar returns in future as well.
This guest post has been written by K. Chidambaram is the Director of Fintotal.com
This post was previously published on our network website squamble.com (this site is now defunct)
image source – pexels.com