We always listen to it. So let us see whether it’s right or wrong. But before starting the main subject, Pls check this video from Investopedia.

The Basic Concept Behind Compound Interest is that you will receive more as time increases because you will also receive interest on the previous claim.

Sure. It is a very great concept to use. But the whole thing will be useless if the interest rate, discount rate, or compounded rate is low or changing. What is the frequency of compounding is also essential. The frequency of compounding is a fundamental factor that makes magic. Say the stated rate is 10%. I Will not tell you anything unless I will not tell you that it’s COMPOUNDED MONTHLY. If you think it doesn’t matter, check the following Table. The assumption is you invest ₹100 at 10%. The frequency is changed.

[table id=53 /]

But it is not the case in real life. When you invest in stocks, you can’t assure the same rate of return. There is N number of factors that are affecting the recovery.

In Bond’s, the compounding is not for infinite time. Every fixed-income security is mature. After which, investors will get capital back. Reinvestment is the most significant factor in our case. So what we are searching for is Receiving returns at the same rate. It is difficult on a fixed income.

So what about equity? Here the case is more complicated. Let’s take some examples with their charts for underlying.

Amazon. One of the best companies on earth, and now even Warren Buffet accepted it. What is the reality?

Not at all a bad return. Average 2893.844% per year. But from the graph, it is clear that the investors who sold early can’t get that return. What do they get?

229.5% average annual return. Now? Am I still joking?

I will show you some more companies from India where I believe that returns are different.

Automobile company. Agreed. But isn’t it outside of the rule?

One of the most favorite companies of investors in India. So, where is compounding?

I know you all must be angry at me for shattering your belief. So I am going to end with one Beautiful chart.