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Long Term Wealth Creation

The snowflake that becomes an avalanche

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DSP

Jul 29, 2024 4 mins

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Summary

This blog highlights the power of compounding using the Nifty Next 50 index as an example. It illustrates how extending a SIP (Systematic Investment Plan) from 10 to 20 years can lead to a nearly six-fold increase in investment value, emphasizing the importance of allowing investments to grow over time.

In this post, we’re going to use the Nifty Next 50 index to bring to life an investing concept you hear about all the time, but whose real impact often remains unintuitive: compounding.

So, first things first: what’s the Nifty Next 50? Well, the SEBI classifies the top 100 Indian companies (in terms of their market cap) as large-cap companies, and while the Nifty 50 tracks the performance of the 50 biggest large-cap stocks, the Nifty Next 50 tracks the performance of the remaining 50.

This index has been soaring for a while now: between January and July 2024, it rose around 39%, and between July 2023 and July 2024, it rose a phenomenal 67%1.

Now here’s the unintuitive bit. Suppose you’d started investing ₹10,000 every month in a Nifty Next 50 index fund in June 2004 and had stopped doing so in May 2014. Then you would’ve ended up with around ₹28 lakh, against an investment of ₹12 lakh. Not bad, right?

But what if you’d kept that SIP going for twice as long, i.e. until May 2024? Naively, one might think that even after taking compounding into account, you’d end up with only somewhat more than twice as much. Maybe three times as much? … Surely not four times as much?!

Brace yourself. Letting your SIP run until 2024 would’ve left you with a final investment value of around ₹1.66 crore! That’s nearly six times what you would’ve got if you’d ended the SIP in 2014 (i.e. ₹28 lakh).

Put simply: merely doubling the SIP tenure (and hence the total amount invested) led to a nearly six-fold increase in your investment’s value!

nifty-next-50

Source: DSP internal

The lesson here is simple: once you have some sound investments locked in, don’t interrupt compounding. Instead, give your investments the time they need to grow.

If you need help putting such ideas into practice, or with any other aspect of the investing process, our experts are always here to guide you: simply click here.

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Disclaimer

Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the index and do not in any manner indicate the returns/performance of this scheme. This note is for information purposes only. In this material, DSP Asset Managers Pvt Ltd (the AMC) has used information that is publicly available and is believed to be from reliable sources. While utmost care has been exercised, the author or the AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers, before acting on any information herein should make their own investigation & seek appropriate professional advice. All opinions/ figures/ charts/ graphs are as of the date of publishing (or as at the mentioned date) and are subject to change without notice. It is not possible to invest directly in an index.
All content on this blog is the intellectual property of DSPAMC. The User of this Site may download materials, data etc. displayed on the Site for non-commercial or personal use only. Usage of or reference to the content of this page requires proper credit and citation, including linking back to the original post. Unauthorized copying or reproducing content without attribution may result in legal action. The User undertakes to comply and be bound by all applicable laws and statutory requirements in India.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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