Invest for 20 years and see how your sixth crore comes from 90% returns on just 10% investment

Consider a snowball rolling downhill, it grows larger with each revolution as it accumulates more snow. That’s similar to how compound interest works. It allows your investments to grow exponentially, with returns accumulating on returns. It’s the reason why the later years of long-term investments see phenomenal growth.

The phenomenon of compounding transforms your money into a powerful income-generating tool. Compounding is the process where the value of an investment increases because the earnings on an asset, both capital gains and interest, earn interest as time passes. This ‘interest on interest’ effect can make seemingly small amounts grow exponentially over the long term, providing the potential for impressive returns.

So, set your target and work towards achieving your goal. The sooner you reach the first milestone, the faster you'll achieve your second and third crores. According to the FundsIndia Research Report, if you invest Rs 70,000 per month at a 12% annual return rate, you can attain your first Rs 1.1 crore in a painfully long eight years. If you continue investing, adding another four years will halve the time required for the second Rs 1.1 crore, and the third Rs 1.1 crore can be achieved in only 3 years. This is the remarkable power of compounding, and by the 20th year, you'll be adding nearly Rs 1.1 crore every year to your wealth.

What is even more fascinating is how your contribution towards each incremental Rs 1.1 crore decreases significantly over the years. For your first Rs 1.1 crore, 60% will be from your initial investment, while 40% will come from returns. By the time you reach your second Rs 1.1 crore, returns will constitute 69%, leaving only 31% from your investment. Similarly, for the third Rs 1.1 crore, 79% will be from returns, with only 21% from your investment. By the time you reach your sixth Rs 1.1 crore, 90% will come from returns, with just 10% from your initial investment.

Overall by the 15th year, your return amount will constitute around 63% of the portfolio while you invested just 37%, which amounts to Rs 1.23 crore as the principal amount and Rs 2.07 as a return. Similarly, for the period of 20 years, 75% will be your return amount while you invested just 25% of your portfolio. When you keep investing for almost 24 years then 82% will be your return and 18% your investment- out of Rs 11 crore accumulated principal will be just Rs 1.98 crore, with the remaining RS 9.12 lakh accumulated through the magic of compounding.

As equities tend to give higher returns over the long term, you can consider investing through a Systematic Investment Plan or SIP in large-cap or flexi cap funds for generating a return of around 12 per cent. It's crucial to consider that the remaining time in your working life plays a pivotal role, as disposable income tends to be lower in the early years. Conversely, having more time allows for a more significant compounding impact. Once you've built your first crore, the returns on that amount also contribute to growth, underscoring the importance of achieving the proverbial "first crore."

Patience and discipline are prerequisites in this journey of compounding. Staying invested over a long time horizon allows compounding to weave its magic and boost your investment returns. Therefore, it is key not to disrupt this process by dipping into your investments.

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In conclusion, the magic of compounding is potent and can lead to substantial wealth accumulation over the long term. The key is to start investing early, be regular with your investments, and have the patience to stay invested. Remember, it's not about timing the market, it's about 'time IN' the market. It is the simplest, yet most powerful tool that every investor should take advantage of to build a robust financial future. It's never too late to harness the power of compounding. All you need is patience, discipline, and time – the three must-have ingredients for successful wealth generation. As Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”