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The Power of Compounding.

Heard this word before ?? I bet you have but do you also know that this can be termed as the most powerful mathematical tool amongst all others.The important aspect of the power of compounding remains to be the simplicity of its application and calcualtion.It refers to reinvestment of the returns or income into the principal amount.The subsequent returns are much higher as the base capital grows.

Suppose you have Rs 1000 in your account which you have invested in stocks or any other instrument.Over a year if you manage to get a return of 10% on your investment you will have 1100 rs at the end of the year.Second year if you manage the same returns the total amount would be 1100 + 10% of 1000 +10% of 100 = 1210.With the same annual interest and subsequently increasing base capital the return amount goes on increasing which can be calculated as per the formula of compound interest..
                                    Return at the end of n years = x ( 1+ I/100) ^n
                   X = principal amount.  I = interest rate or returns . N= number of years.
                                 @ In case of variable returns I does not remain constant
                             The charts shows the gains when compounded in comparison to simple interest.

I meet people who ask me what to invest in , which stocks would be good and how much return can one expect on stocks and other instruments.They come to invest after looking at stock lists published in major websites like nseindia and bseindia.com which shows daily increments to the tune of 10% , 20% in major gainers list. They want to know which stock will move 20% tommorow.Impossible to know if you ask me.If i knew of stocks thats going to move up 20% tommorow I would've retired of work by now.

The conditions also become hard to be explained to newcomers who have'not seen the downturn of last 2-3 years and only have got to see the daily ,weekly gains the stocks are making in the last one year.Suppose if you invest Rs 1 lakh in equity and manage to fetch a return of 100 % in a year ( which many expect to gain within a few weeks given the current market conditions ) and compound it for 10 years the amount comes out to be 1024 lakhs = nearly 10 crores. If earning money in markets consistantly was this easy everyone would be doing the same and not waste their time on anything else.

The sane thing would be to define a good sustainable percentage return and work towards achieving the same.A decent percentage return when compounded annually can take a huge turn at later stages when the principal gets bigger and not to get dragged into scam multibagger scrips because the case in general is that people who are looking for instant gains would not have the patience to wait for a scrip to become a multibagger.The early you start better it is because of the significant gains your investments can generate in the later stages.Be patient ,start early and compound is the mantra.


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