The ‘C’ factor
[dropcap]T[/dropcap]he third letter of the Roman alphabet, ‘C’, rules India. Before you start thinking something else, let me tell you that my statement is apolitical. The three Cs which rules India are the 11 ‘cricketers’, a few thousand ‘civil servants’ and an unknown number of ‘crorepatis’.
To be a cricketer out of a 1.2 billion population is not only a matter of luck, but also sweat and talent. Becoming a civil servant and remaining civil is another story. Now the last C which represent crorerpatis is a word which I first heard in the ’80 – Dhanlaxmi Dewali Bumper, first prize Rs. one crore. Of course, then came the famous Kaun Benega Crorerepati series in Indian television! So, our obsession with three Cs has remained constant, decade after decade. The question is how many of our aam admi can dream of becoming one among the three Cs, asked my friend Abraham.My friend Abraham, who is a school teacher, visited me last Sunday. “You know to be born poor is not your fault, but to die poor is……..right?”. I don’t know what exactly was in his mind. But he looked grim, otherwise always a jolly fellow.
We all suffer from some sort of insecurity about our future. I believe a moderate level of insecurity is good, as it keeps us on our toes. But above all financial insecurities is a plague which affects us all, rich or poor. Not understanding where you stand in your personal financial health is the biggest uncertainty one faces in modern times. As it turns out, Abraham was worried about his retirement. Although he’s been earning for the last ten years with a healthy savings and there was another 25 years to go before his service ends, he’s anxious about his future.
We all know with a proper map in hand, it is always easy to plan out a journey and also know exactly how long it would take us to reach our destination. In financial world, the map implies nothing but understanding certain mathematical equation. Lets assume that Abraham wants to became a crorepati by the time he retires at 60 and he expect a decent long term return of 12 percent per annum. All he needs to do, to reach his goal is to invest Rs. 5,322 everymonth .Yes nothing wrong in the figure, he just needs to invest a modest amount of Rs. 5,322 for the next 25 years.
Let me shock you more. As Abraham’s age is 35 years and he is rather late. If he had started his mission of becoming crorepati ten years earlier then his monthly contribution would have been Rs. 1,555 only with an expected return of 12 percent per annum. By this time you must have gathered your calculator and started doing your own calculations and found out that his real contribution is merely 1555X12X35= 6,53,100. Then, where does this rest of 93 lakh comes from?
It comes from another and the most magical “C” which is known as Compounding. The magic of compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to the process of generating earnings from previous earnings.
Suppose you invest Rs. 10,000 into a particular business. The first year, it gives a return of 20%. Your investment would now be worth Rs. 12,000. Again, in the second year, the business generates another 20%. Therefore, your Rs. 12,000 grows to Rs. 14,400. Rather than your value appreciating an additional Rs. 2,000 (20%) like they did in the first year, they appreciate an additional Rs.400 because the Rs. 2,000 you gained in the first year also grew by 20% too. If you extrapolate to the subsequent years, the numbers can start to get very big as your previous earnings begin to provide returns.
Thus, it is the power of ‘Compounding’, the fourth C which India needs to discover. Let me make you all excited by saying that in this way, each one of us could become a crorepati! Historically, the Indian Stock Market (Sensex) has generated a return of 18.6% per annum on an average. So in theory, if we invest in it and it continue to give us the same return for next 30 years, and a youth starts contributing a monthly amount of Rs. 424 every month from his 18th Birthday onwards and continue to do so till his 50th Birthday, and viola! On his 50th Birthday he’ll be a crorepati. Abraham slept in peace that night! For he got his map. The map with directions for his financial future. It’s time India discovers the power of the fourth “C”, the power of Compounding.
The writer is an investment advisor & can be reached at email@example.com