Power of Compounding
AIF & PMS Experts India got the fortuity to assemble a brilliant webinar in association with the Portfolio Manager of Marcellus on 26th March, 2021. Mr. Vikas Agrawal (MD & CEO of AIF & PMS Experts India) in conversation with Mr. Rakshit Ranjan (Portfolio Manager, Marcellus) addressed the topic – “POWER OF COMPOUNDING – 8TH Wonder Of The World”. The two brilliant minds were seen verbalizing about the importance of compounding in the journey of investment.
The whole webinar has been textualized and a video has been provided to have a better understanding of the whole informative session.
It has been truly said that “Compound interest is the 8th wonder of the world. He who understands it earns it, he who doesn’t pays it!” – Albert Einstein
The history believes in the magic of compounding. The art of multiplying the wealth starts with the basic discipline of analysis, observation and compound interest.
The above depicts the whole purpose of the webinar curated by AIF & PMS Experts India on the title “POWER OF COMPOUNDING – 8TH Wonder Of The World”.
What exactly is compounding?
The evergreen answer to this question is earning interest on your interest! Compounding is nothing but making extra money from the existing money. When we stick to simple interest, we get exactly the same amount of interest which is predefined and it keeps going on the same way. But when we compound it, we get interest on the principal amount as well as on the interest which has been accumulated. The magic lies in the process! Imagine having extra money with no extra efforts.
However, very a few get it implemented. In the Era of investment, the concept of compounding is the need of an hour.
How the magic happens?
Compounding sticks to the ground rules of investment. Value the time, compound the money and see how your money pays you back! Taking an example, below has been illustrated a chart which says that what will be the value of 1 crores invested, if compounded at 10%, 15%, 20% and 25% over 10 years.
The chart says that instead of simple interest, if we compound it at 20% interest per annum, it will be 6x in 10 years, 6×6 = 36x in 20 years, 36×6 = 216x in 30 years. If you stick to quality, you always get meaningful returns on your investment. It is actually the consistency of compounding that makes the process worth implementing. For example, if you compound the interest at 20% for 10 years consistently, the return will be much higher than compounding the money at fluctuating rate. Compounding the money at fluctuating rates eventually lessens the overall returns.
Why consistency is important?
One of the golden rule of investing says that “Higher the risks, higher the returns”! Let us understand how risk associates with consistency. Suppose we are compounding at 20% rate of interest consistently throughout the 10 years. Now, if we are more open to risk, we can witness a fluctuating return too. High volatility can sometime give us higher return or can stuck down to heavy losses too. It becomes difficult to invest the money in case of low or no return.
Consistency means low volatility. It is often been said that low volatility would mean that you can put more eggs in the same basket whereas high volatility would mean you would not want to put more eggs into the same basket. The difference between the consistent rate and fluctuating rate in the outcome of consistency!
Expense ratio has a big hand in outcome. How?
Expense ratio is one of the major part of compounding process. Delta of expense ratio can influence the rate of compounding. Even if you invest a small amount as 1000 or large amount as 100000, the fact lies in the logic and not in the amount.
How the power of compounding balances the impact of Bad-stock of the portfolio?
Power of compounding reduces the downsides significantly. Taking a simple example, if 4 out of 5 stocks are chosen correctly, the mistake of 1 stock becomes minor due to low churn and a long holding period. Power of compounding ensures a better drag upon losses and tries to nullify the impact of bad stock in the portfolio.
The optimism of both the ingenious mind is beyond appreciation. In case you missed the opportunity to associate with the experts, we are providing below the link to connect with them on YouTube!
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