Let’s play a game. You are given two (hypothetical) investment choices and asked to choose one. In the 1st choice, you invest Rs.1 today and get Rs.1 crore after 30 days. In the 2nd choice, you invest Rs.1 today and the amount doubles daily till the 30th day. This means it becomes Rs.2 on the 2nd day, Rs.4 on the 3rd day, Rs.8 on day 4 and so on till the 30th day. You will get whatever is the accumulated amount on the 30th day basis this calculation.

Option 1 is the obvious answer as getting Rs.1 crore at the end of the month by investing just Rs.1 is a no brainer. Option 2 which doubles your money every day can only fetch you loose change. If you do it yourself, you will realise (see table below), that even on day 15, you only have Rs.16,384, far cry from Rs.1 crore. So Option 1 it is.

BUT a smart bird did the calculations till the very end ie day 30 day and arrived at a whopping Rs.53.68 crore. Hard to believe? See the below table.

Imagine if the month had 31 days, you get an eye-popping Rs.107 crore (nowhere near the Rs.1 crore in Option 1). This is because of the POWER OF COMPOUNDING, also called the 8th wonder of the world by Albert Einstein. It means that you may start small but money grows exponentially as the period gets longer and longer.

Illustration -Say you want to accumulate a corpus of Rs.10 crore in your working career of 35 years. You can do this by either saving Rs.15,400 every month via SIPs @12% (assumed) in equity  mutual funds or start with Rs.5,600 per month and step up your SIP by 10% every year for 35 years. Step-up thus gives you the flexibility to start with a smaller amount and grow the amount as your income rises. Though the principal invested in a step-up is higher (as larger SIPs only come in later years and compound for a shorter period) it is certainly a more nimble approach that the simple SIP where you need to start with a larger amount. However, the choice is yours. The table below has more details.

Historically it has been seen that equity mutual funds have the potential to provide higher returns above the inflation rate over the long term. For example, the S&P BSE Sensex has given 15% annualised returns over 35 years from September 1983 to September 2017. If the same is extended over the next 35 years, you would need to invest Rs.6700 per month in a normal SIP and Rs.3000 in a 10% step-up SIP to accumulate Rs.10 crore. But let’s be conservative and stick to 12% returns.

So what stops many of us from reaching this magic number? It’s our behaviour which prevents us from following the boring method of consistency and longevity. Instead, we follow a ‘start-stop-pause-restart’ process which prevents compounding from reaching the 30th day as per the game.

If you press the PAUSE or STOP button in the current volatile market situation, the power of compounding will not work at full capacity. Only by continuing your SIPs for really long periods on a close to perpetual basis, can you target a really BIG wealth kitty. Calculate your returns on investement by using sip calculator. It is not as easy as you may think but certainly not impossible if you have the resilience to continue. These famous lines may offer some solace in the current market situation. We shall overcome, we shall overcome, We shall overcome someday; Oh, deep in my heart, I do believe, We shall overcome someday.

Note: All calculations are only for illustrative purposes and are based on mathematical formulas. It should not be construed as investment advice and there is no assurance or guarantee of returns. Past performance may or may not be sustained in future. Investors should consult their investment advisor prior to arriving at any investment decision. Views are personal.