Posted By: Admin
There are two investors , Karan & Kamal, both are 41 years of age and have done identical investments over the past 20 years in Indian Equity Mutual Funds. However both have followed different practices. While the funds that they invested were Diversified Equity Funds of the same fund houses, the way they managed their investments were very different.
Karan, by nature was a little less sure of Equity markets and edgy as he had an impression that it was akin to gambling and speculative, not really a science and not really a conscious wealth choice. So he would invest Rs 10,000 every month in SIP ( Systematic Investment Plans) , but at the end of the 5th year.. he would find reasons to pull out the investment citing volatility or expensiveness of the markets etc.. is at the end of first 5 years his 6 lakhs investments yielded him 8.16 Lakhs, he used it close part of his study loan he had taken, the next 5 years he restarted and again at the end of 5 years closed it to close another vehicle loan, ie at the end of each 5 year period he would promptly pull out the investment and not allow it to continue.
Kamal on the other hand, was a little less knowledgeable about the equity markets and just continued to keep putting money away of course once in a while he would review the statement but as long as the holdings were above his invested value, he wasn’t too worried, since his salary had over time substantially increased, he did not even feel the strain of this investments and this became a habit. At the end of 20 years, Kamal who invested in the same funds as Karan was worth almost 4 times more than Karan, simply by staying invested right through. Kamal had somehow secretly tapped into the Power of Compounding.
PS : this is not just an apple to apple comparison since Karan is likely to have closed his loans and saved some additional interest outgo.. but more to make a point on staying invested.
Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
So the next time you feel the like stopping or pulling out your SIP/ Equity Investments before 20 years, remember that you are denying yourself the Magic of Compounding to work in your favor. Think Very Carefully. Time in the market is more important than timing the market.
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