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The Magic of Compounding for Wealth Creation

Nov-10-2023Blog by – Mr. Ashish AjmeraRead Time: 4 Min.Word Count: 511
36The Magic of Compounding for Wealth Creation

If there is one thing that most people want to know is how to make more money. Well, there is no dearth of options. However, what if you could make your money grow itself? All you need to do is let the magic of compounding happen.

Understanding Compounding

Compounding is a method to calculate total interest on the principal amount of your investments. While simple interest pays the same interest amount every year, compounding considers interest earned on reinvested amounts.  


Basically, you allow your returns to earn more returns by reinvesting them instead of withdrawing them.


Let’s say, you invested Rs200 for two years at a 3% interest rate. The simple interest will give you Rs6 for the first year and Rs6 for the second year. However, compounding will yield Rs6 for the first year and Rs6.18 (200+6*0.03) for the second year. 


When you apply the concept of compounding to equity trading or any other asset class, it can multiply your money in the long run. Hence, compounding is one of the best ways for wealth creation.

Tips to Leverage Compounding

Here are a few tips to make your money work hard from compounding:

Start Early

Compounding needs time to generate a large corpus for you. Hence, you should start investing your savings or monthly income from as early as your 20s. Your money has the potential to grow exponentially till you near retirement.


Invest Wisely

Investment in bonds, fixed deposits, equity mutual funds, exchange traded funds, dividend stocks and mutual funds are some best options to earn compound interest. However, make sure that you align your investments with your financial goals and risk tolerance aptitude. 


Start SIPs

Systematic Investment Plans (SIPs) are a proven wealth creation tool for compounding through mutual funds. You can invest as low as Rs500 daily, weekly, monthly or quarterly in SIPs.  Let’s say, you invest Rs1000 every month in SIPs which gives 8% returns. The compounding factor will generate Rs73,967 (5 years), Rs1,84, 166 (10 years) and Rs9,57,367 (25 years)!


You can use an online SIP goal calculator to estimate the amount you need to invest for a particular number of years to meet your financial target. A mutual fund advisor can also give you the right advice.


Explore Forex Markets

If you are an experienced investor, then you can invest in the international stock market or currency market in India to gain benefits from the compounding effect. Forex compounding can magnify your money substantially due to interest rate differential in the long run.


Be Patient

Compounding can reap you huge earnings but it takes time to give the desired results. Hence, be patient and avoid the temptation to invest for the short term or withdraw within a few years of investment. Give your money a chance to grow!


Conclusion

If you want to make the most of the magic of compounding, you should consult an investment advisory firm like Ajmera x-change. We can help you with online investing and provide customised guidance based on your wealth creation goals.


Get in touch to know more.

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