‘Compounding’ is a term extensively used in mutual funds. It’s a phenomenon by which small amounts invested on a regular basis grow into a significant sum over time.
Also Read– How to become rich: Ten tips that you should apply from today – National Financial Awareness Day
New Delhi: Are you in your twenties looking to become a crorepati by the time you retire? Then you should know the 15*15*15 rule of investing.
Simply put, according to the 15*15*15 rule, one can amass a crore by investing only Rs 15,000 a month for a duration of 15 years in a stock/mutual fund that offers 15 per cent returns per annum.
Read More:– EPFO Passbook Portal Down: Angry PF Subscribers Share Grievance On Social Media
This is purely because of compounding. Let’s understand what compounding means before we proceed to understand the 15*15*15 rule, let’s first understand compounding.
What is Compounding?
‘Compounding’ is a term extensively used in mutual funds. It’s a phenomenon by which small amounts invested on a regular basis grow into a significant sum over time. The interest earned during a particular compounding period will in turn earn interest in the next compounding period.
Read More:– Reliance Industries News: 1st time ever – Big RIL plans revealed | All details here
The principle of compounding is the backbone of mutual fund investments, and it can take people from rags to riches over time. The maximum advantage of compounding could be taken by starting to invest in mutual funds at the earliest.
Power of Compounding
The power of compounding could be best understood with examples that relate to the common man. Imagine two individuals Ram and Sham. While Golu began investing when he was 20 years old, he stopped investing after ten years, but did not redeem his holdings, and stayed invested until he was 60. Sham began investing when he was 30 years old and continued the investment till he reached the age of 60.
Read More:– EPF vs VPF: What is Voluntary Provident Fund? Know benefits and when you should begin VPF contribution
| Parameter | Mr Ram | Mr Sham |
| Age when entered | 20 years | 30 years |
| Age when exited | 60 years | 60 years |
| Investment duration | 10 years | 30 years |
| Holding period | 40 years | 30 years |
| Amount invested | Rs 2,000 a month | Rs 2,000 a month |
| Total amount invested | Rs 2,40,000 | Rs 7,20,000 |
| Returns earned | 10% a year | 10% a year |
| Corpus accumulated at the time of redemption | Rs 81,27,183 | Rs 45,20,796 |
| Growth | 33.9 times | 6.3 times |
*Data compiled from Cleartax.
At the age of 60, Ram has made more money than Sham despite investing way lesser than him. This is the power of compounding. Ram had already accumulated corpus in this mutual fund investment account by the time Sham began investing.
Read More:– Higher EPS: EPFO releases details on how to apply for higher pension
And Ram never withdrew his fund units, he just left them invested without buying anything more until he turned 60. These units kept on accumulating compounded interest which swelled up Mr Ram’s portfolio to a whopping 33.9 times his investment.
What Is the 15*15*15 Rule Of Investing?
If you invest Rs 15,000 a month for a period of 15 years in a stock/mutual fund that offers you 15 per cent interest on an annual basis, then you will be sitting atop Rs 1,0027,601 at the end of 15 years. While you invested only Rs 27 lakh, you’d have earned Rs 73 lakh.
Read More:– ITR filing: TDS deduction on interest income and how to avoid it – All you need to know
Whether you invest for 15 years or 30 years, you should begin the process of investment early.
“If someone begins mutual fund SIP at the age of 25, he or she would be able to invest for 35 years, leading to higher compounding benefit and maturity amount,” SEBI registered tax and investment expert.
