Every person in the market wants to invest at a place where he gets good returns but most of them don't know where to invest. Some people deposit their money in saving accounts or some people invest in FD. If they invest for a long time these investments give you maximum 7-8% returns which is not a big amount.
Rich people lives luxury life because they know the way where they can get maximum returns from their investment. In Finance language, this way is called Compounding Of Money. Today I will teach you what is Compounding.
Well let's get started.....
Magic of compounding is so much surprising that we didn't expect. Let's learn compounding with a short story......
Once there was a man, he has two children one's name was Ali and other's name was Saqib. The man wants to check their children which one has healthy mindset and also wants to teach them how to manage money.
The person tell their children "I will give pocket money in two different ways for 1 year you guys have to choose. First way is you can take 1000 Rupees per month. The second way is I will give you 10 rupees first month, 20 Rupees second month, 40 rupees third month and further so on for a year.
Ali decided to choose first way to get pocket money because he was clever enough. Saqib think that every month I will get 1000 rupees this is better offer and he decided to choose second way.
The man started to gave pocket money to their children. At starting, first 6 month was unhappy for Ali because on the other side saqib got 6000 rupees and Ali got just 320 Rupees.
But Ali knows compounding very well and he waited for completion of year. At the end, Saqib got just 12,000 Rupees in a year and on the other side Ali got 20,480 rupees that was a high profit.
Can you imagine a small amount of 10 rupees reached 20,000 in just 1 year. Suppose, if this small amount compounded for 3 years so the final amount goes to Billions. This is magic of compounding
Most of the people thinks that how much maximum profit can be retrieved from compounding but reality is totally different. When someone invest in compounding people get demotivated at starting and stop their investment at current point. But if any one hold patience for long - term he will get a unimaginable return from it. That's why the great man of the word Albert Einstein declared compounding as 8th Miracle.
Another Story of 3 Friends
_Well, Let's learn compounding in relation with investment market with very simple example. _
This is the story of three friends Asad, Noman and Akbar. They recently completed their graduations. All three friends age is almost 21-22 years and started their job. All three friends decided to invest 10,000 rupees from their income.
Asad's family background is very average and their parents have quit traditional and typical mindset. They told their sun to stay away from shares and stocks market complications and invest his 10,000 rupees in FD.
On the other side his mother advice him that gold's price never get down at any way so Invest in Gold. Asad invest 5000 rupees in FD and remaining 5000 rupees in Gold.
Noman do research in investment market and take advices from different people and he decide to invest 5000 in FD and 5000 in Mutual Funds thorough SIP.
Akbar belongs to modern and educated family and he has full freedom to invest his money at any place. Akbar take financial advices from experts and do research on investment market.
He invest his whole 10,000 rupees in stocks market index funds because he knows the power of compounding. Now time to see the results after 30 years all three friends invest 36 Lakh in 30 years.
First of all we talk about first friend Asad he invested 18 Lakh in FD in 30 years and this amount increases with profit of 7% and reach to 61 Lakh. And on the other side he invested 18 Lakh in Gold that reached after 30 years 74 lakhs.
After 30 years Asad's portfolio is 1.35 Crores. Problem is that in 30 years inflation goes so much high due to this value of money goes down continuously. So actually Asad don't get any profit from his investment.
Let's talk about second friend Noman who invested 36 Lakh in FD and mutual Fund. He got 61 Lakhs as a return and on the other side from mutual fund he got 2.40 Crores. Noman got 3.0 Crores from his whole investment that can be considered a good return.
If we talk about Akbar, he invested his whole money 36 Lakh in stocks market index funds. He get return of 6.0 Crores that is extra ordinary and appreciable. He got Highest returns as compared to his friends due to his market knowledge and importance to compounding. And if we do calculations and after inflations adjusted the returns value remains 5.0 Crores that is an excellent amount.
So Hiveans , you have seen in this story that how all three friends get their returns with different way of Investments. The third friend knows the magic of compounding and he got successful in his life.
Moral of Story
So moral is knowledge of good authentic investment is extremely important for now a days. Our mindset is very simple we don't use our mind and get ourselves out of complications. As you see what is magic of compounding. You will get a very good return from compounding for a long time. One important factor is in it that is patience. You have to acquire patience than you will get your reward.
I hope you guys have learned something from this and I hope you guys can now change your mindset and get successful in your lives.
Signing Off MindGamer