Power of Compounding - YouTube

Friends, when common people like you and I or retail investors

Think about ₹1cr, it feels very strange to think about it

We often think that collecting ₹1cr or a few lakhs is impossible for us

No matter how many savings or investment we do

But today I will tell you about such a secret of money

Which, if we utilize it properly

Save a little and invest it at the right place for a long time

Then, not only 1cr but making several crores is not a very difficult thing

I, Jagdeep Singh welcome you to the Groww channel

We must've heard the term compounding many times

But we can never fully understand what it means

And no one can explain it to us in simple terms

So, today I will explain to you in very simple terms

What simple interest, compound interest, compounding mean

And how it can make a small amount to a very big amount

Now, let us understand compounding in very simple terms

Consider that there are two friends A and B

Both of them had a little money

After spending a lot of money, they saved a little

And thought that they should invest the money somewhere so that they can get some returns

A invested in bank A

From where he got simple interest

And B invested in bank B from where he got compound interest

Both friends made an investment of ₹100

And both banks said that they would get a 10% return annually

Now, let us see how that investment performs in the coming years

If I talk about the first year,

So, in the first year, they both made an investment of ₹100

Now, after the first year, bank A

Gave a 10% return on ₹100 so he got a return of ₹10

So, after a year, his money increases to become ₹110

In the same way, if I talk about B, then B made an investment in bank B

Which also gave a 10% return but on compound interest

So after the first year,

B also gets a ₹10 return on his invested value

Now you must be thinking that after the first year, they both got the same return

So, there is no difference between simple interest and compound interest

But this is not true because in the coming time, there will be a lot of difference in their returns

Now, I will talk about the second year

If, I talk about the second year,

Then bank A will give A

The same return even in the second year

If I explain this to you in simple terms,

His invested value was ₹100

So, in the second year, he will get a 10% return on ₹100

So, he will get a return of ₹10 again

So his investment will increase and become ₹120

Now, I will talk about B

The 10% return that B gets in the second year will not be on ₹100

But he will get the return on ₹110

This is the basic difference

Which we can see in compounding

So, the return that B gets in the second year will be a return of ₹11

But not a return of ₹10

So, the small difference that you can understand here

That in the second year

The return that A got was still on ₹100

But the return that B got was not on ₹100 but

He got it on ₹110

Continuing to do this process, when I reach the fifth year, then in the fifth year,

The return that A gets

Is the same as the first year

He made an investment of ₹100

He gets a return of 10%

So, even in the fifth year,

He gets a ₹10 return on his invested value

So, his total money increases and becomes ₹150

But, now let us talk about compound interest, about B's investment

So, B's investment like I told you, every year

The interest that he gets is not on ₹100

But on the previous year

If I talk about the fifth year,

The return that he gets in the fifth year,

He gets it on ₹146 and not on ₹100

So, in the fifth year, the compound interest that he gets,

Will be of ₹15, and not of ₹10

So, his investment value increases to become ₹161

And A's increases to become ₹150

So, notice the different here, the difference is of ₹11 in both of their investments

Now, ₹11 must sound like a very small amount

But I will tell you a small concept in percentage

That the return A got in the fifth year was of ₹10

The return that B got in the fifth year was of ₹15

So, B's return is 50% more than ₹10

So, only in five years, the return he got,

Was more than 50%

For those of you who are still confused, I will explain this concept again in very simple terms

What happens in simple interest is that, you get the return on the money invested

But in compound interest, the money that you invest

And after the first year, the return you get,

You will get a return on that in the next year

Which means that the money keeps multiplying and becomes a very big amount

In the coming few years

Now, let us talk about investment

If, I, every month for the next ten years

Invest only ₹10,000

At a place, that will give me a compounding return of 12%

So, what was the investment you made? You made an investment of 12 lakhs

But that investment value will increase to become how much?

That value will increase to become more that 23 lakhs

So, you know how much gain happened

Your gain was more than 11 lakhs

Friends, you invested 12 lakhs and your gain was 11 lakhs

This is the power of compounding

In this way, with a little savings we can make a lot of money

What I spoke about right now, I only spoke about ten years

But if your age today is around 25 years

Then until you retire, you can do a little savings of ₹10,000 every month

So, I will tell you, that every month by making a savings of ₹10,000

And invest it in an asset like this,

For the next thirty years,

Then how much your money will increase to become

Your money will reach to such an amount

Which we only dream of, maybe in crores

Now let me tell you what the actual value will be

Friends, this is that magic figure

Your investment of ₹10,000 for the next thirty years

Will increase to become around 3.5cr or maybe more than that

I had told you in the beginning

Our dream is to collect 1cr rupees

But, if we make an investment of only ₹10,000

For the next 30 years

Then the investment value be will only 36 lakhs, which was the actual value

But because of returns, the value will become more than 3.5 crores

Which means that you made an investment of only 36 lakhs

But, just your gain is 3.2 crores

So, the value increases to become more than 3.5crores

This is the secret of money

This is a small concept

Which, if used at the right time and in the right way

Then your small savings, can in the coming time, turn into crores

Now, friends, you have understood compounding

But along with compounding, there was a small and very powerful concept

And that is investment horizon

For how long do you make an investment

You must already know, that if you mix compounding with a time horizon, a longer time horizon

Then compounding is much more powerful

As the time duration for compounding increases

The value of compounding keeps going up

So, take a pledge with me, that from today wherever you invest

You will first see how much return you get from there

Whether you get simple interest or compound interest

Because, friends, simple interest gives you a return on your earned money

But with compound interest not only do you get a return on your earned money

But in the long run

You get a return on your earned money, and get a return on that as well

If, after watching this video you feel like you should start investing

And in the coming time you want to make a big amount

So, you should keep only three things in mind

First, patience

Patience for a long term investment

Because if you don't make an investment for a long time, then your return will never be good

Second

You should see what kind of return you're getting, are you getting a simple return or a compounded return

Because compounded return is extremely powerful

Third

You should see in what kind of asset do you want to invest in

For which, you have to do a little research

Because there is a lot of information in the market

If you use that information properly for your benefit

You can make your earned money into a very big amount in the coming time

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Happy investing!