Compounding : Who understands it, "earns it", Who doesn't, 'pays it' !

When it comes to doubling the money or in other words when people talks about investment, they always mention the term power of compounding. It is a great systematic way to make the investment grows and simultaneously the investor wealth. While checking my old portfolio, I noticed it increases many folds over my expectation.

(my own edited image)

The power of compounding is the idea that you can earn interest on both your initial investment and on any interest you've already earned. This is also known as compound interest. When you earn interest on both your initial principal and the interest that accumulates, your money grows exponentially. For example,

if you invest $1,000 and earn a 8% rate of return in the first year, your total investment would increase to $1,080. In the second year, the interest earned in the first year would be added to your opening balance, increasing your interest income. This cycle continues each year, helping you generate and accumulate interest more quickly.

This process continues annually, resulting in surprising growth over time. This cumulative effect can help our investment grow, and we can earn more the longer we stay invested. Here are some of the investment examples, where "power of compounding" helps the investment grows multi folds:

Mutual funds : Compounding can be an effective way to create wealth in mutual funds. Some benefits include starting early, staying invested for a long time, and using shorter compounding intervals.

Dividends : Many companies offer dividend reinvestment plans, where investors can reinvest their cash dividends to buy more shares of stock. This increases the number of shares, which in turn increases future income from dividend payouts.

Bonds : If you buy a bond that pays a fixed interest rate, and you reinvest the interest you earn, you can see your returns increase over time. For example, if we invest $1,000 in a bond that pays 4% interest, we will earn $40 the first year. If we reinvest that $40 at 4%, you'll earn $41.60 the following year, because it is based on $1,040.

To make the most of compounding, we can try to: Start investing early, Stay invested for a long time, Use shorter compounding intervals, Use systematic investment plans (SIPs), and Be disciplined with our investments schedule / routine. This will helps us in creating a good wealth over the time.

Many times the market fluctuation
makes investors to withdraw the investment. Even though they do not have any immediate need of fund. And in process they lose the compounding advantages. I remember, one of my banking friend asked me to withdraw it, and reinvest in other scheme. But I remain invested and looking at the 31% return over last 5 years, I don't have any regret.

Stay invested !!

Namaste @steemflow

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