The power of "Power of Compounding."

The power of compounding is the most undermined concept in the world of investing. Technically people “know”, but most people often overlook or undermine the power of the same.

What is the technical definition of the “power of compounding”?        

Compounding means reinvesting your earnings and earning a return on both principals and reinvested money. The power of compounding helps your investment grow at an increased rate. The compounding effect increases with an increased investment time horizon. That means the longer you stay invested or earlier you start investing, the greater will be the power of compounding on your investment.

Now comes the example of compounding:        

Let’s take my example, Rupanjali.

Rupanjali and her best friend, Doyel, talk about investing at the age of 25 years. Doyel started her investment journey with Rs. 5000 per month from her first salary, but Rupanjali wanted to “enjoy” life… so she kept postponing her investment till she was 35 years old. Now, let's compare their corpus at the age of 50 years old when they both decide to invest in a Book Cafe in Goa… woahhhhh!!?

However, Doyel’s investment amount at the age of 50 years is approximately Rs 1CR (assuming a CAGR of 12%), while Rupanjali’s portfolio is only about Rs. 50 lakhs!?

How… why… what happened?? Rupanjali invested Rs. 3 lakhs MORE than her best friend, Doyel, but her portfolio is about 50% less… really??? How on earth!

Well, THIS is THE POWER OF COMPOUNDING, my friend.

Now, imagine if Doyel continues her investment for 10 years… i.e. investing another Rs. 6 lakhs. What is her corpus going to be? Any guesses??? Is it going to be 2 times, 3 times or more?? It is going to be approximately Rs. 6.5 CR… Yes, you heard me RIGHT!

Now, imagine her continuing for another 10 years, till 70 years of age… just her initial Rs. 5000 per month (assuming she didn't increase or withdraw anything and the market has been kind to give her a consistent 12% return year-on-year), her corpus would be… any guesses? It's only about Rs. 21.6 CR..:D

But there are LOADS of assumptions here.

1. Doyel continues her investments without a break, which most people don’t or can’t.
2. The market gives a consistent return of 12% CAGR, which could be higher or lower in reality!
3. She doesn’t increase or decrease her investments in the entire tenure of 45 years, which is a next-to-impossible affair!

But the crux still remains to be the same. The longer the duration of investment, the better it is, irrespective of the “quantum” of investment.?