How Compounding Works? Problem with Stocks & Mutual Funds

Compounding is a phenomenon that works wonders over time. It's like a snowball rolling down a hill, gathering more snow and growing larger as it goes. At its core, compounding involves earning returns on both the original investment and the returns that have already been generated. This creates a snowball effect where wealth accumulates exponentially over time.

Here's how it works: let's say you invest Rs. 1000 in a stock or mutual fund that earns an annual return of 10%. In the first year, you earn Rs. 100 in returns, bringing your total investment to Rs. 1100. In the second year, you earn 10% on the entire Rs. 1100, not just the original Rs. 1000. This means you earn Rs. 110 in returns, bringing your total investment to Rs. 1210.

As the years go by, this process repeats itself, with your investment growing larger and larger with each passing year. The longer you leave your money invested, the more powerful compounding becomes. Over time, even small, regular investments can grow into significant sums.

Compounding is often referred to as the "eighth wonder of the world" because of its remarkable ability to grow wealth over time. However, it's important to remember that compounding works best over long periods. It requires patience and discipline to let your investments grow and resist the temptation to withdraw your money prematurely.

By harnessing the power of compounding and staying invested for the long term, you can build wealth steadily and achieve your financial goals. So start early, invest regularly, and let the power of compounding work its magic for you.

Compounding isn't just about finances; it's a principle applicable to life's many facets. Small, consistent efforts, like daily exercise, can compound into significant improvements in health. Similarly, acts of kindness in relationships build trust over time. Skill-building, with just 15 minutes of practice daily, leads to expertise. This universal principle underscores the power of consistency in achieving incremental gains. So, whether in finances or personal growth, embrace the compounding effect, and watch as steady efforts yield remarkable results across all areas of life.

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