The power of compounding.

Ever heard of this saying?

"It is not timing the market that is important, but the time spent in the market"

If you try to understand the principle behind this..it is nothing but simple mathematics!

Under the core of investment principles, there is one important strategy that illustrates the best method of generating wealth over long term. It is nothing but the power of compounding!

The longer the time you stay in the market, the better the returns and the wealthier you are!!

To be simply put, the earlier you start investing, the better off you are at the end. Start investing early and you cannot even believe the number you can achieve. It all lies in the simple principle of compounding. It is better illustrated using the table below. The table illustrates two different scenarios where person A starting investing earlier that person B. However, it is an assumption that the rate of return in both the cases is 10% p.a. Whether the number shown is achievable or not is out of scope of present discussion.

Scenario 1:

Person A started investing from age 20 with a monthly investment of 1000. By the time he attains 40 years of age, the corpus he might have build with a 10% return is as shown below.

Monthly Investment : 1000

Amount invested per year: 12000

Rate of Return (assumption): 10% p.a.

No. of years invested: 20

Total corpus at the end of 40 years (Person A's age):

RS. 756029.9933

You can also notice in the above picture, the way the returns and the wealth builds up over a period of time.

Let us see another scenario where person B starts investing from age 30 (10 years later than person A). He invests the double the amount per year when compared to personA. Let us see the wealth he is able to generate.

Person B:

Monthly Investment : 2000

Amount invested per year: 24000

Rate of Return (assumption): 10% p.a.

No. of years invested: 10

Total corpus at the end of 40 years (Person B's age):

RS. 389623.0999

If you carefully observe, even if person B invests twice the amount than person A, he is able to build only around 50 percent of the wealth that person A is able to generate. This itself iterates the fact that, it is the time you spent in the market that matters and not timing the market.

Moral: Invest early to generate maximum returns. Spend more time in market through disciplined investing.