The Potency of Compounding

Escaping 'The Matrix'!

‘Kaun banega crorepati’ roughly translating to ‘who shall be a millionaire’, a sensational quiz-show which began airing in the early 2000s and just concluded its 16^th season here in India, had us all hooked back in the day! Millennials from modest upbringings would probably recall their parents gasping as the contestants creeped up to the highest reward, woefully awaiting such a lucky break in their own lives as the only ticket to fortune... And while many of the Gen X’ers rejoiced getting to a fraction of the game-show winnings upon the golden handshake at their ripe age of sixty, would such a tenet really suffice in today’s day and age? While an archetypal 9-to-5 may form the initial basis for our earnings, if we go through our entire careers just selling time without any investments or alternatives, then we’ll surely max out sooner or later. Hence, it is imperative to grasp that the only plausible solution lies in getting to a stratum where wealth breeds wealth!

So first off, let’s be clear that there’s a heaven and earth disparity between investing during the first decade of your career and squeezing out peanuts during the last like our forefathers! Even if you’re pouring in the exact same amount into the exact same instrument, the returns from the former would dwarf that from the latter, rather interestingly by many orders of magnitude, that too without putting a single extra penny into the accumulated corpus… Therein lies the power of compounding! It works at every level but becomes more and more visible with the sum invested. As we know, the first crore lingers the longest!

Now, I’ve been dibble-dabbling in the world of investment for some time now but only taken it up sincerely of late. Growing up, we were always advised to allocate our funds in very low fixed return instruments like FDs, NSCs, KVPs and the likes, the reality being that these can only help safeguard your money as an emergency fund rather than grow it, by simply matching the inflation rate. Similarly, savings bank accounts are even worse shrinking your worth over time. So, with ballooning costs of real estate, education and what not, what else can we turn to? Wasn’t the stock market taboo, with trading equivalent to gambling the last time we had checked with our predecessors?

Well, may be the question we ought to be asking ourselves is what really is 'risk' in this context… So, let’s say you purchase a relatively benign mutual fund plan while the market is fluctuating, it is of great relevance that the short-term highs or lows are only notional gains or losses, which would only be realized upon the sale of such an asset. And consistently investing in a risk adjusted diversified portfolio has historically always given a higher order of return in the long run also ensuring liquidity, even without precipitous attempts at angel investing or crypto harvesting or the likes.

Trust in the potency of compounding and all of a sudden having a net worth in the ballpark of a multi-millionaire doesn’t seem so farfetched after all… At the end of the day, patience and a structured approach are vital for building generational wealth, especially with an ever-compounding family size! 🙏