Introduction

Envision generating ₹1 crore out of just ₹10,000 without any significant risks or lottery wins. It sounds like a dream, don't you think? The true strength of compounding, however, is in its ability to increase your wealth over time with little effort. The finest aspect? It's not just for wealthy people or financial professionals. Anyone can use compounding to increase their wealth if they are persistent, patient, and make wise judgements.

We'll go into great detail in this blog post on how to grow that modest ₹10,000 investment into a whopping ₹1 crore. Are you curious about the process? Continue reading for the outcomes that are well worth the wait—the magic is in the maths!

Understanding Compound Interest

The key to this strategy is the power of compound interest. Compound interest is the interest you earn on both your initial principal and the accumulated interest from previous periods. In the stock market, compounding comes into play when your investments grow year after year, and the returns from one year become the principal for the next year.

The Compound Interest Formula

The formula to calculate compound interest is:
$$ A = P \times \left( 1 + \frac{i}{100} \right)^n $$

where:

• 𝐴 = total amount after n years
• 𝑃 = the principal amount (initial investment)
• 𝑖 = annual interest rate (or return on investment)
• 𝑛 = the number of years

Scenario 1: Moderate Growth of 15% per Year

Historically, the stock market (e.g., Nifty 50 or Sensex) has provided an average return of 15-20% per year over the long term. Let’s assume

• Initial Investment (𝑃) = ₹10,000
• Annual Return (𝑖) = 15%
• Time (𝑛) = how long it takes to reach ₹1 crore

We want to find 𝑛 such that A=1,00,00,000 (₹1 crore).

Using the compound interest formula, we rearrange it to solve for 𝑛:
$$ 1,00,00,000 = 10,000 \times \left( 1 + \frac{15}{100} \right)^n $$

This simplifies to:
$$ 1000 = ( 1.15)^n $$

$$ log(1000) = log( 1.15)^n $$

$$ log(1000) = nlog( 1.15) $$

$$ n = \frac{\log(1000)}{\log(1.15)} \approx \frac{3}{0.0607} \approx 49.42 \text{ years} $$

With a 15% annual return, it would take approximately 49 to 50 years for ₹10,000 to grow to ₹1 crore.

Scenario 1: Moderate Growth of 15% per Year

If you invest in individual stocks or mutual funds with a higher average return, say 20% annually, your money grows faster.

Using the same approach:
$$ 1,00,00,000 = 10,000 \times \left( 1 + \frac{20}{100} \right)^n $$

simplifying to:
$$ 1000 = ( 1.2)^n $$

$$ log(1000) = log( 1.2)^n $$

$$ log(1000) = nlog( 1.2) $$

$$ n = \frac{\log(1000)}{\log(1.2)} \approx \frac{3}{0.0791} \approx 37.92 \text{ years} $$

With a 20% annual return, ₹10,000 grows to ₹1 crore in approximately 38 years.

Key Takeaways:

1. Get Started Early: Your money has more time to grow through compound interest if you invest as soon as possible
2. Be Consistent: Regular investments, even in small amounts, can accumulate significantly over time.
3. Stay Invested: Avoid trying to time the market. Holding for an extended period of time makes compounding work to your advantage
4. Concentrate on Growth: : Invest in mutual funds or high-growth stocks that have a solid track record.