What is compounding interest and the 15*15*15 rule?
As an investor, there are many standard rules of money-making that you might have come across. In this article, we will learn about the very famous 15*15*15 rule. We will discuss the compounding magic that works wonders here.
The rule says that if you invest Rs 15000 per month for 15 years and generate 15% returns annually via a SIP in an equity mutual fund, then at the end of the 15 years, you will have an accumulated wealth amounting to Rs 10,027,601 (Rs 1.00 crore).
Breaking it down, we see that the total investment amount over the 180 months is Rs 15000×180 = Rs 27,00,000 – this means that the total returns you generate are equal to Rs 73,00,000.
The rule is so powerful that if you double the investment period from 15 years to 30 years, your accumulated wealth will equal Rs 10.38 crores (wealth increases 10x times).
The staggering figures that appear above are the result of compounding.
What is compounding interest?
Compound interest implies interest earned on interest. The magic happens when you keep adding funds to your investment and do not break it.
As your invested value grows every year, the base (on which returns are generated) increases. The return generated also rises with time – this is how a very normal amount of Rs 15000 per month can lead you to become a crorepati in 15 years.
A time frame of investment is an essential factor when we talk about compounding. The more time you give your investment, the more returns you will generate. This is because your investment base is growing bigger and bigger over time.
As we saw above, doubling the investment time increases the wealth corpus by ten times.
Let us take an example to see how compounding works. Assume that person A starts to invest from the age of 20 and stops investing at 30 years of age, whereas person B starts to invest from 30 years until his retirement at 60 years.
The table below clearly illustrates the magic of compounding.
Person A turned out to be the smarter among the two investors because he started his investment journey ten years earlier than person B and thus, was able to amass a fortune even with just one-third of the investment amount of person B.
The most considerable teaching that the 15*15*15 rule gives us is giving our investments ample time in the market; more importantly, the earlier you begin, the richer you become.
Mutual funds offer you high flexibility in switching from one category to another, with redemption at desirable times. To take advantage of compounding, start your investment journey today.
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