Power of Compounding: Capital market experts often advocate long term investment. They say that if you are thinking of making a big fund by investing money in equity, then enter the market only with long term goals. By maintaining investment for a long period, the risk of market fluctuations is covered. To achieve such goals, Equity Mutual Fund is a better option, in which the benefit of compounding is also available if the investment is maintained for a long period.
Returns in mutual funds can be as high as in equities, while it is also safer than investing money directly in stocks. The most popular way to invest in mutual funds is Systematic Investment Plan (Sip Investment). Suppose you want to deposit an amount of Rs 1 crore by the time your child becomes an adult, which can be used for his higher studies. You would like to know how SIP can help in this. Let us know how this can be accomplished with the 18x10x15 rule.
If you are also ready to do SIP for a long period and have a target of creating a fund of Rs 1 crore, then the rule of 18x10x15 in mutual funds can be helpful in achieving your target. Here this rule means that if Rs 10,000 is invested every month for 18 years in such a scheme which is giving interest at the rate of 15 percent per annum, then on maturity your fund will become Rs 1 crore. Whereas here your total investment will be only Rs 21.6 lakh. That means you will get a profit of around Rs 89 lakh on your investment.
This is how you will get Rs 1 crore in 18 years
SIP per month: Rs 10,000
Tenure: 18 years
Expected return: 15 per cent per annum
Fund on maturity: Rs 1.1 crore
Total investment: Rs 21,60,000 (21.6 lakh)
Net profit: 88,82,553 (88.8 lakh)
SIP per month: Rs 10,000
Total tenure: 21 years
Estimated return: 15 per cent per annum
Fund on maturity: Rs 1.8 crore
Total investment: Rs 25,20,000 (21.6 lakh)
Net profit: Rs 1,52,06,727 (1.52 crore)
The main objective of the 18-10-15 formula is to take advantage of the power of compounding. It has the ability to convert a monthly investment starting from a fixed amount into a huge corpus. Keep in mind that the longer you stay invested, the greater the benefit of compounding.
The power of compounding can be estimated from this example: Suppose you have invested in a mutual fund and have chosen the option of SIP (Systematic Investment Plan). Your aim is to send your child abroad for higher education when he becomes an adult and for this you have started a monthly SIP of Rs 10,000 for 10 years at an estimated interest rate of 15 percent. The total amount invested by you will be Rs 12 lakh in 10 years. Whose value will be around Rs 30 lakh in 10 years.
If it is kept for 18 years then the total amount of investment will be Rs 21.6 lakh, whose value in 18 years will become Rs 1.1 crore.
On keeping it for 21 years, the total investment will be Rs 21.6 lakh, whose value will become Rs 1.8 crore.
This is the power of compounding.
(Disclaimer: The above article is for information purposes only. Please consult professional investment experts before investing. The author or the publication will be not responsible for any loss incurred.)
