Vivek Kaul

Mumbai: As the rains hit the windowpanes, Amit’s thoughts flashed back to almost eight years ago, when he was waiting for the first rains, sitting on the Marine Drive. And when they did come, he realised he was not the only one rejoicing. People cheered and clapped as the shower got more intense. Soon enough, a young woman had burst into a dance, encouraging a few others to shake a leg, too.

Minutes after the performance, he had walked up to her with the oft-quoted line — “Do you believe in love at first sight or should I walk by again?”

The cliché had worked. There she was now, after all those years, nestled close to him, looking out the window just as he was. Come rain and their romance was alive again, despite each being in the rate race to earn enough, save up some and live out goals and dreams.

Amit’s thoughts veered to the finances he had been able to work up over the years, the risks he had taken with investments for bigger returns and how a lot of it had proved miscued.

Investments, just like relationships, needed tending over a long time to get better, he was convinced by now. Around the time they met, he had started investing Rs 5,000, then a princely sum for him, in the Reliance Growth Fund every month. His friends often chided him for having taken the mutual funds route, that too a systematic investment plan. But he persisted with it.

During those days, as even now, equity investing was all about timing the market, depending on one’s judgement of where it was headed. Amit himself had taken those bets on quite a few occasions. Some had proved winners, but a host of others hadn’t, with the result that he had lost much of his hard-earned savings.

The Reliance Growth SIP was a saving grace. As on June 18, 2008, his investment of Rs 4.8 lakh (Rs 5,000 per month x 96 months) in the scheme had grown to nearly Rs 33.5 lakh. The fund had given him an average return of 48% per annum.

He had even got Maya to invest in the same fund around four years back.

Only, she had started investing Rs 10,000 a month, perhaps in a bid to catch up on lost time. However, as on June 18, 2008, her investment of Rs 4.8 lakh (Rs 10,000 x 48 months) was around Rs 9.2 lakh. The fund had given her an average return 34.4% per annum.

What swung the balance in his favour was the four years his investment had been allowed to grow. It had to do with the power of compounding.

John Allen Paulos explains it rather nicely in his book, A Mathematician Plays the Stock Market: “Assume that you deposit $1,000 at 10%. After one year, you’ll have 110% of your original deposit — $1,100… after two years you’ll have 110% of your first-year balance — $1,211… after three years you’ll have 110% of your second year balance — $1,331.”

Clearly, greater the time money stays invested for, irrespective of the investment genre, the greater time it gets to compound.

“You know, I really should have got you to invest in that fund earlier than you did,” he told her, breaking the silence.

“Yeah, but I’ll still say you should have invested Rs 4.8 lakh at one go eight years back, instead of investing Rs 5,000 a month. I think that would have got us over Rs 57 lakh by now.”

“May be you are right, but where would I have got so much money back then? Besides, what if the market didn’t go up as much as it has since then?”

“You have a point, but may be you should have had that much money before we met, somehow,” she cribbed, tugging at his sleeve.

“By the way, how did you work out that math so quick? “Quick? I ran a check last night.

Want some more coffee?”

The example is hypothetical

Source : DNA