Advertisements
Inflation can steadily erode the value of your income. However, long-term investing can provide returns that outpace inflation-through the power of compounding.
Year after year, any money that you invest may earn interest, dividends, or capital gains. When you reinvest those earnings, they help generate additional earnings; those additional earnings help generate more earnings, and so on. This is called compounding.
For example, if an investment earns 8% per year and these earnings are reinvested annually:
- After one year, your total return will be 8%.
- After five years, your cumulative total return will be 47%.
- After 10 years, your cumulative total return will be 116%.
- Best of all, the sooner you begin investing, the greater the compounding effect.
Consider the example of Chhaya and Punit, both 65 years old. They worked for the same company for 35 years and both invested in the same managed fund.
- Chhaya started investing at age 30. She invested Rs. 1,000 each year for ten years and earned 8% per year. Then she stopped contributing. Her investment continued to earn an 8% annual return. When she reached age 65, her Rs.10,000 had grown to Rs.107,148.*
- Punit didn't start investing until age 40 and then invested Rs.1,000 each year for 25 years. He also earned 8% per year. At the end of the period, his Rs.25,000 investment was worth Rs.78,954.
As you can see, although Chhaya contributed to her investment for 15 fewer years than Punit and invested Rs.15,000 less, she accumulated Rs. 28,194 more than Punit-simply because she started investing ten years earlier.
