Where were you when your Math teacher was teaching you Compounding?

Let me start with a DISCLAIMER: There is no such product (either option A or B) that exists in the market, nor am I promoting such a product or service. So if you are reading for the sole purpose to know what this product is, then you should stop now. Please know that if it sounds too good to be true, then that is exactly the case. 

Now coming back to the question:

Did you choose "A". If you did, then let me guess your investment profile. You have a large investment, at least 50%, in an LIC policy, a term deposit or some fixed income product. (And I feel sorry for you, because you are at high risk. You desperately need a financial advisor; not an insurance salesman masquerading as a financial advisor.)

Power of Compounding is the eighth wonder of the world. You learnt about Simple Interest and Compound Interest in school. Maybe in the 5th grade or so. But you didn't pay attention to this very important topic in your math class, and that is the reason I am writing this here. 

Future Value = Present Value x (1+r)^n

The most powerful variable in this formula is "n", which means Time. The bigger that number is, the bigger your Future Value looks. "

Of course that is the case, but who has a 1000 years?". 

This formula has a deeper meaning. The most important sign in this formula is "^" (only when you are on excel, not on a calculator). It is not a simple arithmetic progression. If it were a simple "+" sign, your required return would still look extremely small. If you kept adding only 1 to Option "B", you would only have Rs.31. A normal person thinks only linearly, and thus is unable to grasp the concept of compounding. It is only practice that will allow you to differentiate. 

Option "A" although sounds lucrative is nothing compared to Option "B". When one is making an investment decision, one has to look at all the options objectively. In the two options given, you have all the required data points to make an informed decision. You knew the end result for option "A", and since the final number sounded big, you picked it. Did you bother picking up your calculator instead? It would have taken you less than 2 minutes to arrive at the right answer. There was no time limit to answer this question. Similarly in life, you have to make such decisions. So do not be in a rush. 

The opportunity loss here was more than a hundred crores. In option "B", you would have not even touched a crore by the 24th day, and in just 6 more days you will have more than a hundred crores. This is what we refer to as the Power of Compounding. If you had opted for Option "B", but you made the mistake of taking out your money every time it doubled, then you would never arrive at the required end result. You were better off opting for option "A".

So what did we learn from this? 

One, weigh all your options; (meaning: calculate and compare. Even when one doesn't have precise information, try to quantify and calculate a range of scenarios)

Two, be patient;

Three, don't exit early!