I met a father who has started a sip for his son at the son’s age of 10. Not bad, but let us take the example of a Dad who starts a SIP for his son at the son’s age of 0. Of course there are such parents…and their names are Parekh, Mehta, Kothari, Maheshwari…and not names like Ramakrishnan, Balakrishnan, Subramanyam….you know what I mean. Families which understand compounding better.

The return on the Sensex so far from 1979 till today is about 18% p.a. with dividends re-invested (TRIP). We will not get into an argument about what will be the ‘r’ – we will assume it will be 18%. I know one thing in life – r could be 12, 19, 11, 22,…..whatever it is – if the total amount invested is zero, what you will get is zero. We will treat it as a way to accumulate a decent size of corpus and assume that the ROI is 18% p.a.

So let us call this kid V and see how much money he will have if his parents invest Rs. 25000 per month from his age of zero.

Well it is an interesting thought is it not? If Mr. Parekh (only he will do) were to invest Rs. 25000 per month for his son from his age of zero (Rs. 3L a year) and he were to increase it by 5% every year (which means when the kid is 1 year old, the sip amount changes to 315,000 and becomes Rs. 758,000 per annum when the kid is 20 years old.

Does not sound difficult till here, right?

And say Mr. Parekh stops investing at the kids age of 20, what happens?

Well, at 13% p.a. return it becomes, hold your breath, Rs. 1000 crores at the kid’s age of 65. Not bad, right?

Well, I would go and tell the kid “you should invest as much as you can as a sip into this fund…and then do not touch it till you feel like retiring. This kiddo, is your retirement kitty. Go and live your life….

However Senior Mr. Parekh will have to do one very, very difficult task. Teach his kid (son or daughter, I don’t wish to antagonize Mrs. Parekh, Mrs. Mehta, Mrs. Kothary, Mrs. Kothari)….the virtues of sitting tight..waiting for the marshmallows.

How do you teach patience? Simple teach delayed gratification. Tell the kid “here is Rs. 500” if you preserve it as it is I will add another Rs. 500 every month. Or I will add whatever is there in your kitty on a regular basis…and at the end of the year you can spend it. The power of waiting.

Rs. 1000 crores because you started on the day that the kid was born…and the kid at the age of 53 can tell his boss “hey jerk you know what..my Dad (Grandad) created a ‘Asopalav’ for me. I don’t need to see you everyday and lie “Happy to see you” . Dammit, I am not happy to see you, and you can go take a walk.

Compounding! ha….there are vdos of very senior people who give examples of 24% pa, 20% pa and one very famous anchor would say “getting 20-25% should not be difficult over 25 years”.

Seriously? This guy has lost his marbles…..HE should play ‘goti’ with kids. He will cause less damage.

http://www.subramoney.com/my-account/

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1. ##### Sagar

Compounding in an asset which can produce negative return for some duration is incorrect understanding. You but at price x and sell at price y. There is no magic of compounding involved.

2. ##### Pradeep

Its an ambitious article. But if a human being has to wait 60 years to have his marshmellow, he might need to preserve himself like a glacier. In this world when an attack is only a bad luck away, its waste of a birth to live a life like that for 60 years. Also do not discount the madness of a war anytime. All those Mehtas, Parekhs and Kotharis are known to live king sized life all the time unlike those in the peninsula.

3. ##### RichLife

The concept is well understood, thanks for showing this vision
1. Invest continuously
2. Increase the allocation every year
3. Let compounding work for long period

My daughter is 5 years I will start for her same plan.

4. ##### Sachin

I think 18% pa ROI is too steep. ROI of 2-3% above inflation would be more realistic over long periods of time.

5. ##### Deepak

Over optimistic calculations….Entire discussion focus on asset creation but for whom and why.

6. ##### Vijay Soni

Thank you for suggestion. I am planning d same for my newborn