50X Gains Till You Retire Power Your Investments with Magic of Compounding Manish Jain FOW 28

both you as well as myself

we will love to retire with several extra crore rupees in our bank account

In this video, I will demonstrate how managing just 1 lakh rupees worth of investment well enough

over the period to your retirement you can actually make up to 6-7 crore rupees more

And no, I am not exaggerating. Look at these graphs for example

All four of them will tell you the power of compounding where the maximum impact of compounding

which is literally a linear line is seen towards the end of the compounding curve

All it needs is patience and time. Suppose you start with 100 rupees

at 10% interest per year. At the end of the year, you will get 110

Now, if you put that amount again for the next year, you will have 110 as principal, not 100

So, you will now end up with 121. The extra one will come from the interest on that 10 rupee

Now, it may not sound like a substantial gain. But when you do it consistently over years

it leads to something called compounding. You might end up with several extra crores

if you are a bit more cautious and use compounding to your benefit

Let's jump to the excel model straight away. The row 3 has the interest rate per instrument

So, if you keep money in your bank account, it gives you roughly 4% interest

FDs, when the interest rates are low, they give you around 6%

When the interest rates are high like now, probably 7.5% for certain 10 years

Bonds issued by NBFCs have slightly higher coupons, slightly higher risk. Risk does not mean they will default for sure

The safer ones give you around 9% interest. The mid-risk one gives around 10.5%

And the relatively higher risk ones gives you 12% return. When we talk about equity

expected CHGR over long term is usually 14%. In high performance years like now

the returns could be as big as 25-30%. In certain years, it could also be negative at a year level

High risk equity is 18% kind of CHGR. Some people make a lot more than that also

The simple idea is that if the market in general is giving you 10% or 12%

there will be certain equities which will give you 20-25%. Some equities will give you 2-3% or even negative returns

The average is 10-12%. Can we target the higher return ones? I have drawn this plan for a period of 40 years

The reason for 40 is, suppose someone is starting at the age of 25 right now

this plan will continue till about 65, which is approximately 5 years beyond retirement

But again, there are milestones drawn in these green lines. Depending upon your age

depending upon how many years you want to foresee, this will help you visualize how much money you will have

Let's start with the first example. Note that initially I have kept inflation at 0% and tax at 0%

We will get into that slightly later to understand the realistic money which will come into our hands

If we keep money in the saving bank at 4%, you start with 1 lakh

it keeps increasing. 1 lakh becomes 1,04,000 and slightly increases. Now you see, it is 1,08,160

which is basically the interest on the 4,000 rupee amount. It keeps on increasing

At the end of 5 years, it will be 1,21,000 and so on

This number will go to 4,80,000 by the end of 40 years

which is approximately 5x. Let's jump to fixed deposits. 6%, 7.5%, we again start with 1 lakh

The starting numbers are not looking very different. 1,33,000, 1,43,000, 1,80,000, 2,60,000

That is the typical visibility we have when we compare instruments. Now let's go towards the end

10,28,000, 18,4,000, which is a 1.8x return in terms of comparison. Let's now jump to bonds

If you don't understand bonds, then just take bonds as something like an FD, but with a higher risk and higher return

Same amount, 1 lakh, returns are 9%, 10.5%, 12%. After 5 years, 1,53,000, 1,64,000, 1,76,000

Most of us will not even pay heed to this part. Year 10, 2,71,000, 3,10,000

Difference, but again, not big enough to catch our eyes. Let's now go towards the end

What do we have here? 31,40,000, 54,000, 9,300,000. Nearly 1 crore. Now let's just do a little bit of contrast with FDs

10,00,000 and 18,000,000. Here it is 31,00,000, 54,000,000 and 9,300,000. This is the huge difference your portfolio may have

if you choose to invest money in bonds instead of FDs. This does not mean you break your FDs today

and invest all your money in bonds. There has to be a concept of balanced portfolio

However, a lot of us avoid bonds saying it is risky. The risk is not investing in bonds if you ask me

because you are going to for sure earn a lot less than what the bonds will give

Even if there is a 10-20% kind of default eventually in the bond, this number will still be way higher than what the FDs are going to do

Let's now jump to equity. 14% which is what most mutual funds ETFs will offer

and most people would be happy to get in general over time. Equity high risk 18%

Same starting amount 1,00,000. By the end of 5 years, 1,92,000, 2,28,000

Again, not a big difference. 3,70,000, 5,23,000. A significant difference. 7,00,000, nearly 12,00,000, nearly 14,00,000, nearly 27,00,000 by year 20

There is a difference of 2x already. Keep scrolling, keep scrolling. 40th year, 1,089,000 versus 7,050,000

1,00,000 became 7,050,000 if you compounded it at 18%. Contrast it with bonds, 93,00,000 at 12% compared to FDs at 7.5%, 18,00,000

Let's contrast to FD, realistic interest, which is 6% over time. 1,00,000 becoming 10,00,000 and 1,00,000 becoming 7.5 crores

Note that in equity, there will be years and spans of years where your returns may be negative

This is just an extrapolation of the number. Let's bring in a concept of inflation and tax just for illustration

Inflation means 6%. Approximately, you could have a different value. Tax is different for different instruments

Bonds, typically, if you hold them for a longer period, is 20%. Very important concept, often ignored that there is a lot of saving in taxes also if you choose the right instrument

Equity is 10% long-term capital gain or LTCG. Same principle, 1,00,000. Let's just go to the final numbers

This number right now, post-inflation and post-tax is 93,00,000. Don't get alarmed

The number means it is equivalent to 93,00,000 rupees of today. After paying the government tax and accounting for inflation, at the end of 40 years, you would be able to buy something which is worth 93,00,000 today by investing 1,00,000

That is what I meant by accounting for inflation and taxation. To maximize your gains from the market, you have to have a balanced portfolio which reasonably balances your risk

That's one. And second is you have to understand the timing of various asset classes

There may be times when FD returns are higher. There could be times when equity is really low and offers you an opportunity to earn a lot more than even 20% in a year over the next 3-4 years

There could be times when the interest rates are high and as a result, you might end up with very high bond yields

Say for example, now there are NBFC bonds available even at 12%. Yes, there is risk associated with most of the instruments as you go up higher in the return

Note that there is risk associated even with fixed deposits. Government of India only guarantees up to 5,00,000 worth of risk in the event a bank goes bankrupt

Bankrupt is an interesting term. So FDs also are not risk-free. You might have heard last year several banks in Silicon Valley, California went bankrupt

And a lot of people who had money in that bank, they lost their money. They were not parked into equity or bonds or something

One very important concept is risk does not mean you will end up losing money

Risk is positive and negative which means risk is the probability of earning more money than you thought you will

Or it may be losing a bit of your capital if you book losses

That too by losing patience and not waiting for a recovery