Let's talk compounding: https://t.co/XfqmoxKaYP
— Vanguard (@Vanguard_Group) May 31, 2017
We always listen about it. Lets see weather its right or wrong. But before starting the main subject, Pls check this video from Investopedia.
The Basic Concept Behind Compound Interest is You will receive more as the time will increase. Because you will also received interest on the previous interest.
Sure. It is very great concept to use. But the whole thing will be useless if the interest rate, discount rate or compounded rate will be low or changing. What is frequency of compounding is also important. Frequency of compounding is real factor which is making magic. Say stated rate is 10%. Will not tell you anything unless until I will not tell you that its COMPOUNDED MONTHLY. If you are thinking that it doesn’t matter then Check the next Table. Assumption is you invest ₹100 at 10%. Frequency is changed.
|Frequency of Compounding||Total amount after compounding with 10% stated|
But it is not the Case in real life. The reason when you invest in stocks, you can’t assured the same rate of return. There are N number of factors which are affecting the return.
In Bond’s, the compounding is not for infinite time. There is maturity for every fixed income securities. After which, investors will get capital back. Reinvestment is biggest factor in our case. So what we are searching is Receiving return at same rate. It is difficult in fixed income.
So what about equity? Here case is more difficult. Let’s take some example with their charts for underlying.
Amazon. One of the best company on earth and now even Warren Buffet accepted it. What is the reality?
Not at all bad return. Average 2893.844% per year. But from graph it is clear that the investors who sold early can’t get that return. What they get?
229.5% average annual return. Now? Am I still joking?
I am going to show you some more companies from India. Where I believe that return are different.
Automobile company. Agreed. But isn’t it outside of the rule?
One of the most favorite company of investors in India. So where is compounding?
I know you all must be angry on me for shattering your belief. So going to end with one Beautiful chart
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