What is the power of Compounding?

What does it mean: The power of compounding?

A small amount of money can become a large sum of money over time thanks to compounding. The greater the time period, the higher the value. If you decide to save 1 lakh rupees annually in a fixed deposit at a bank for 30 years at a 5.5% interest rate (post tax effective rate), you will see your savings grow to 76.4 million rupees. This is almost twice the amount that you have invested.

However, historically, Equities have outperformed all other asset classes. Equities can return approximately 16 percent over a longer time period. Your savings will increase to 4.1 crore rupees if you invest the same amount in equities instead of a fixed deposit at a bank. This is thirteen and a quarter times what you invested.