How can you see the magic of compounding :You must have heard the term power of compounding being used many times in finance. If we understand the meaning of compounding in simple language, it means interest getting added on interest and your wealth increasing rapidly. That is, compounding is the process in which you earn more interest on the interest already deposited. If you want to take maximum advantage of compounding, then for this you have to maintain patience in your investment. If you are really able to do this, then the real magic of compounding will be seen. Here we have given information about a rule of compounding, 8-4-3 Rule, through which after a time your wealth will increase by Rs 50 lakh every year.
10 mutual fund schemes giving 65-77% return in 1 year, competing with the stock market in giving profits
8-4-3 Rule in Compounding
You can understand the 8-4-3 rule of compounding to grow your money faster. According to this rule, if you do a SIP of Rs 30,000 every month and your scheme gives a return of 12% interest annually (yearly compounded 12% interest), then in the first 8 years your wealth will increase to Rs 50 lakh. In the next 4 years only, your wealth will increase from Rs 50 lakh to Rs 1 crore. After this, it will take only 3 years to increase from 1 crore to 1.5 crore. That is, if it took 8 years to reach 50 lakh the first time, then it took 4 years to get the next 50 lakh and then only 3 years to get the next 50 lakh.
Tata Motors: Tata Group’s giant stock may fall, brokerage also alerted, it is in your portfolio
Magic of Compounding: Rs 50 Lakhs per year
If you maintain your investment even after 15 years, then the real magic of compounding will be understood from here. In the previous calculation, you saw that your wealth is increasing by Rs 50 lakh each in the interval of 8 years, 4 years and then 3 years. Now if you continue to invest in the same scheme as before, then it will take only 2 years to reach 2 crores from 1.50 crores. At the same time, it will take 1 year 8 months for 50 lakhs to increase from 2 crores to 2.50 crores. Then it will take 1 year 4 months to increase from 2.50 crores to 3 crores, then it will take 1 year 3 months to increase from 3 crores to 3.50 crores.
After this, it will take only 1 year to increase from 3.50 crores to 4 crores. Whereas, it will take only 1 year each to increase from 3.50 crores to 4 crores, 4 crores to 4.50 crores and 4.50 crores to 5 crores. That means your wealth will increase by 50 lakhs every year. This is the real magic of compounding.
These 5 large cap schemes gave Rs 1 crore to those who did SIP in 15 years, total investment was only Rs 28 lakh
Owner of 5 crores in 24 years
It is clear from the calculation that the benefit of compounding is available only through long term investment. If you maintain your investment for 24 years as per this rule, then you will get a fund of Rs 5 crore. In which you will have to invest Rs 30 thousand every month in a scheme where the annualized return is 12 percent.
Explain Compounding
When you invest your money, the return or interest received on it can be added in two ways. First, simple interest or return, in which interest is added on the money deposited by you. Second, compound interest, in which return is added on the principal amount deposited by you as well as the interest earned on it. For example, if you have invested 1 lakh and the interest received on it after one year is 10 thousand. So if you add interest to the principal amount, this amount becomes Rs 1,10,000. Now the next interest will be added on Rs 1,10,000. This process will continue further.