Complicated Mathematical Calculations

In mathematics, during class VI we learned the below-mentioned power of compounding formula and we had solved more than hundreds of problems based on that. However, in actual life, we never learned how to take compounding benefits despite knowing the compounding formula since childhood.

The actual problem is that in a market-linked instrument, where the interest is not guaranteed like FD, the rate of return is not in our hands and we should never ever focus on that. What is in our hands is the time period & principal amount to deploy. However, the majority of investors are not sure about their investment time horizon. Their short term investments become long term & vice versa and this mainly depends on the market & scheme performance. 

There are certain things to observe & follow appropriately:

First, MF category & Scheme should be selected based on the investment time horizon and not on the return generated.

Second, The impact of power of compounding starts from day one, however, it is clearly visible only after 2 decades when your investments get manyfold. The human behavior is like that majority of the SIP get stopped in the first 2 years and who is going to have patience till next 20 years?

Third, people can wait for decades & decades in FD, small saving schemes like PPF, EPF, also in insurance, gold, property but nobody wants to give time for equity to grow which has the highest potential to create wealth in the long term than any other instruments.

Forth, even today people invest in equity for short-term profit generation and try to speculate rather than invest.

The formula for SIP investment & compounding gets more complicated and one should not try to get into the nitty-gritty of this, rather focus on investment time horizon and select asset class accordingly.

Finally, one should also understand 12% CAGR in lumpsum investment and 12% CAGR in SIP investment, both will have different maturity value and should not compare with one another.