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The power of compounding can change your fortunes

March 24, 2009
Albert Einstein had once remarked, 'The most powerful force in the universe is compound interest'. The concept is cliched, overused from an investment perspective; it may be ill-timed to reiterate the power of compounding, especially when the market is down in the dumps.

Disciplined investment can go a long way, one need to get bogged down by intermediate glitches such as these. Ravi Sharma, 25, a technical consultant walked into my office; he had only one goal: he wanted to become a millionaire. No, he wasn't inspired by the movie Slumdog Millionaire, for everyone is not lucky enough to win a million on a game show. He wanted to put his money to hard work!

What is compounding?

We aren't defining the mathematical term, the achievement of academics is to apply them in daily life.

The wonder of compounding (in investing terms) is to make your money work, to transform it into a state-of-the-art, highly powerful income-generating tool. Compounding is the process of generating earnings on your asset's reinvested earnings. Compounding works on two basic premises: re-investment of earnings and time.

Simply put, the longer time you leave your money to compound, the higher is the wealth you generate.

Text: Anil Rego. A CFA-PGDBA, Anil is the founder & CEO of Right Horizons, an end-to-end investment advisory and wealth management firm.

Photograph courtesy: Right Horizons

Also see: How to pay off your home loan faster

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