Let’s illustrate compounding with an example: Imagine a monthly investment of Rs 5,000/- with a 12% annualized return in stock markets. In the initial decade, the investor puts in 6 Lakhs, resulting in an investment value of about 11.21 Lacs. Moving on, in the subsequent 20 years, the invested amount increased by 3 times to Rs 18 Lacs, but the investment value would have gone up 14 times to around 1.54 Cr. Notably, this gain has occurred in the last 5 years. That is how compounding works. Most of the gains are back-loaded.
In the equation of investing, time is the most critical factor, followed by the amount invested and the potential returns achievable.
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