Power of Compounding Calculator

How To Use Power of Compounding Calculator (Tutorial Video Transcript)

The power of compounding calculator helps you visualize the growth of your systematic investments. The corpus that you create from any investment has got two contributions, one from the actual investment that you make and one from the growth of that investment due to the return that you get from the instrument that you invest in. Let's say your annual take home salary is about 4,000, and you manage to invest 10% of that take home, and the rate at which this contribution grows is expected to be about, let's say, 9 or maybe let's make it 10%. So your initial annual take home salary is 4,000. You invest 10% of that, and you are going to increase this investment by 10% every year, and you want to invest for 25 years. And Now, what is the average rate at which this investment would go? Now, it's very tempting to enter a very high number like 10, 12% or 15% here. But we must take into account that the investment that we will make will not be fully in a capital market-linked asset like equity, which can generate a higher return than fixed income. Only a part of it will be in equity and a part of it will be in fixed income asset.

So this average This rate of return should represent the post-tax income that you get from the entire portfolio which has got an asset allocation, let's say 50 to 60% equity and the rest in fixed income for a 25 year period. So let's conservatively estimate that to be 10%. So now if I calculate, I scroll down, I see a cash flow chart. You see the years, the The investment that you make, you can see that you start off with 40,000 per year, and then it grows at the rate of 10%. This is the corpus value. The total contribution from the investments that you make, and the contribution from the growth of the investments. So initially, the contribution from the investment will be high, and the contribution from the growth, that is the contribution from the return, contribution from the return will be low. But then slowly, the contribution from the growth will take over as time progresses. So these are graphed here. So you can see, if you go your mouse over, you can see that the red is the contribution from the growth and the blue is the investment contribution. Initially, the investment contribution is higher, but as time progresses, the contribution from the growth becomes higher and higher.

And this is the percentage contribution from the investment and the percentage contribution from the growth. So initially, Basically, the contribution from the investment is very high and the contribution from the growth is low. Over time, at some point, they become equal, and then the contribution from the growth becomes higher than that from the investment. Now, it should be kept in mind that this is a rather simplistic projection. If you are going to invest a significant chunk of your money in capital market assets, then the The growth will not be a constant 10%, the portfolio growth will not be a constant 10%, and this table will have fluctuations in the corpus value, and you can see the fluctuations in the corpus value here. You should recognize that this illustration is a simplistic one, and it's meant for beginners to get an idea of the power of systematic investing, but it should be kept in mind that when you actually invest, you will not see this steady growth, and it will fluctuate.