Rewards of Investing – Return, Wealth Building, Power of Compounding

The pain of discipline (saving) yields the reward of Wealth. Understanding how returns work is key to staying motivated.

1. Concept of Return

Return is the profit earned on an investment. Total Return = Capital Gains + Income (Dividend/Interest)

Example:

• Bought Share at ₹100.
• Received Dividend: ₹5.
• Sold Share at ₹120.
• Gain: ₹20 (Price) + ₹5 (Dividend) = ₹25.
• Return %: (25/100) × 100 = 25%.

Real Rate of Return

The return after adjusting for Inflation. Real Return ≈ Nominal Return - Inflation Rate

• FD Rate: 7%
• Inflation: 6%
• Real Growth: Only 1%. (This is why FDs barely build wealth).

2. Wealth Building

Wealth is not high income; it is High Net Worth. Investing builds wealth by:

1. Accumulation: Adding savings regularly (SIP).
2. Appreciation: Asset value growing over time.

Wealth gives you options: The option to quit a toxic job, start a business, or help others.

3. The Power of Compounding (The 8th Wonder)

Compounding means earning interest on interest.

• Simple Interest: Earn on Principal only.
• Compound Interest: Earn on (Principal + Accumulated Interest).

The Snowball Effect

Imagine rolling a snowball down a hill. It starts small, but as it rolls, it picks up more snow, becoming gigantic.

Example: Investing ₹10,000 monthly for 20 years.

• Total Invested: ₹24 Lakhs.
• Value @ 8% (Debt): ₹59 Lakhs.
• Value @ 15% (Equity): ₹1.5 Crores.
• Small difference in rate = Huge difference in Wealth.

The Rule of 72

A shortcut to know when your money doubles. Years to Double = 72 / Interest Rate

• At 6% (FD): 72/6 = 12 Years.
• At 12% (Mutual Fund): 72/12 = 6 Years.
• Equity doubles your money twice as fast as Debt.

4. Power of Time (Start Early)

Two friends invest ₹5,000/month @ 12%:

• Early Earl (Starts at 25, stops at 35): Invested for 10 years. Total ₹6L. Let it grow till 60.
• Late Larry (Starts at 35, contributes till 60): Invested for 25 years. Total ₹15L.

Who has more at age 60?

• Early Earl: ₹1.15 Crores (despite investing less!).
• Late Larry: ₹94 Lakhs.
• Lesson: Time in the market > Amount in the market.

Summary

• Total Return: Includes both price hike and regular income.
• Real Return: Make sure you look at returns after inflation.
• Compounding: Works best over long periods (>10 years).
• Rule of 72: Quick formula for doubling time.
• Urgency: Starting today is infinitely better than starting next year.

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