From Director’s Desk | Anirudh Dar

One of the first things people notice when they navigate through our website is a section called, The Good Life, by Plutus. On this section we have a calculator that shows possible growth rate combinations of equity mutual funds vis-à-vis other asset classes. The default illustration shows a monthly investment of Rs 5000/- growing to a sum of Rs. 1.98 crores assuming a 16% annualized growth rate in 25 years. At the same time, a monthly RD, invested for the same duration, in a bank at a generous rate of 7% will grow to only Rs. 40.74 lac. Does the staggering difference in return bother you enough to want to understand why this happens?

Every single investment advisor will tell you that a systematic investment plan or a SIP works on two main fundamentals. Rupee Cost Averaging and the Power of Compounding. I believe that while these two are extrinsic to you, the one that works best for SIPs or any long-term investment is patience. This virtue does not require money. It just requires you to continue to believe in the capital markets and remain invested. It is only becauseof the third virtue that the first two principals most rely on.

Rupee cost averaging can be easily applied through Systematic Investment Plans as these helps lower the cost of your investment over the long term by automatically purchasing more units when the prices are low and fewer units when the prices are high. The biggest plus of this is that it completely eliminates the necessity by some of us to try and time the markets because investments in SIPs get invested on a predetermined date each month. In falling markets, when one purchases at a lower cost, the average purchase price for a fund goes down which is hugely beneficial in the long-term.

Compounding, on the other hand, is truly the eighth wonder of the world. For the uninitiated, compound interest makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually.

In my example earlier, I had assumed an annualised return of 16% on your investments. Imagine an investment of Rs 1 lac at the end of one year becoming Rs. 1.16 lacs. Now, in the next year, you will earn 16% on a new base of Rs. 1.16 lac. It will grow to more than Rs. 1.34 lac meaning the interest you’ve earned in the second year was Rs. Rs. 18,560/- as against an interest of Rs. 16,000/- in the first year, despite your investment growing at the same 16% as it did in the first year. This is the magic of compounded interest.

Money making isn’t rocket science. But having patience is an art. The only logical question is that do you have it enough of it, to make money, one small step at a time.