Retirement Corpus Planning: Power of compounding provides great reward to an investor who believes in the importance of long-term investment. Investors who enter with a large amount but lack patience and quit the investment race early get little benefit of compounding, but those who make investments for a long time often gather a large corpus with a small investment. The impact of the power of compounding can be more striking in the long run as quitting the investment race a few years early may cost one dearly.
In this write-up, through examples, we will tell you how your peer may gather an extra Rs 3.39 crore corpus by investing a few lakhs of extra amount for just 5 years.
Impact of compounding in long-term investment
In compounding, the investment growth of the previous years adds to the principal, and for the next cycle, you get growth on the entire amount. When this happens after every cycle, the snowball effect helps grow your investments faster with time. Let’s see how your Rs 3 lakh investment in a mutual fund can grow in 10, 20, 30, and 40 years at a 12 per cent annualised return.
In 10 years, estimated capital gains will be Rs 6,31,754, and the estimated corpus will be Rs 9,31,754.
In 20 years, estimated capital gains will be Rs 25,93,888, and the estimated corpus will be Rs 28,93,888.
In 30 years, estimated capital gains will be Rs 86,87,977, and the estimated corpus will be Rs 89,87,977.
In 40 years, estimated capital gains will be Rs 2,76,15,291, and the estimated corpus will be Rs 2,79,15,291.
If you look at the last 10 years of growth in the above example, the estimated corpus has grown by more than 3 times. It’s because compounding is more evident in the long run.
How your peer may gather Rs 3.29 cr extra corpus
Let’s assume you and your friend start a Rs 15,000 monthly step up SIP investment where both of you boost your investment amount by 5 per cent every year. The expected annualised return is 12 per cent. Your friend decides to have the investment for 30 years, and you for 25 years. Let’s see the corpus that you and your friend can gather in those years.
Your investment in 25 years will be Rs 85,90,878, estimated capital gains will be Rs 2,86,51,849, and the estimated corpus will be Rs 3,72,42,727.
Your friend’s investment in 30 years will be Rs 1,19,58,993, estimated capital gains will be Rs 5,81,78,268, and the estimated corpus will be Rs 7,01,37,260.
It shows that with an estimated Rs 33,68,115 investment, your friend could build an Rs 3,28,94,533 extra corpus.
Conclusion
To make the most of your investment, it may be better to start investing early and for a long time.
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)