Very few investors realize that they can create a good corpus with as less as 10% - 12% annual returns. All it needs is a little bit of patience and a strong belief in the power of compounding. Simply put, gaining from compounding interests involve reinvestment of income and the principal, year after year. To get a better understanding of how compounding interest helps substantially increase the returns by a marginal increase in the rate of returns, we have this table listed below. It shows the difference in return if an amount of one lakh is invested at different rates (8, 10, 12, 15 percent) for tenures of 10, 15, 20, 25, and 30 years.
Magic of Compounding
Return on Investment (In Lacs)
| ||||
Tenure (years)
|
8%
|
10%
|
12%
|
15%
|
10
|
2.16
|
2.59
|
3.10
|
4.04
|
15
|
3.17
|
4.17
|
5.47
|
8.13
|
20
|
4.66
|
6.72
|
9.64
|
16.36
|
25
|
6.84
|
10.83
|
17.00
|
32.91
|
30
|
10.06
|
17.44
|
29.95
|
66.21
|
As you can see an amount of 1 lakh if invested at 8% p.a. for 30 years yields a cumulative return of around 10 lakh, whereas the same amount if invested for a similar tenure at 12% and 15% yields a return of around 30 and 66 lakhs respectively, which are almost three to six times of what one would have gained at 8%. Therefore, a wise decision would be to invest in an asset class that gives you an average 12%-15% of return, and let it compound year on year for great returns.
Let’s take a look at some asset classes that have a historical record of yielding average returns of 12% and more.
Real Estate
The expectations that most people have from this asset class is sky high, and that’s because real estate has always delivered great returns when invested for longer periods. A study in 2013 showed how some areas in Delhi/NCR rose by 600% in a period of 7 years, the annual rate of return being a whopping 32%. Many people are not clear as to how gains from real estate investments are taxable, and this is why they delay their decision of buying and selling a property. In such a case investors should consult an established taxation services firm in India to clear their doubts.
Equity
There are periods when investments in stocks yield a return of more than 20%, and therefore, expecting a return between 12% and 15% is not unrealistic. Research suggested that any investment in equity for a period of seven years has a 64% probability of earning more than 15% and a 74% probability of earning more than 12%. All you need to do is not panic even if there are prolonged periods of no return.
Last Few Words
Now that you are aware of the power of compounding and the asset classes that you need to invest in to create a corpus for yourself start investing. However, before you invest it is advisable to consult a tax expert from any of the reputed taxation services firms in India to get an idea of the taxes that you will have to pay on your returns.
