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Power of Compounding in SIP

The frequency of the middle-class investing in financial markets has considerably increased in the last decade. One primary reason is the rise in ROI (Return on Investment), especially in Mutual Fund SIPs. These SIPs are quite popular among retail investors as they operate on the concept of compounding.

What is compounding?

Compounding basically means compound interest. If we go back to the school books, we would understand compound interest as interest on interest. In simple interest, the interest is calculated only on the principal amount. However, with regard to compounding, the interest is calculated on the previous interest along with that on your investment. So, the final amount is naturally more as compared to simple interest.

How Does Compounding Increase Your Return on Investments?

The same logic of compounding is used in calculating the returns on your investment. For example, if you have made an investment of ₹ 10,000 with an annual interest rate of 10%, then upon compounding, the first year-end will generate 1000, which is the same as the simple interest. But in subsequent years, the amount on which the interest of 10% will be calculated will increase to ₹ 10,000 + 1000 = ₹ 11,000. Hence, this increase in the initial principal will automatically result in a high rate of return in every subsequent year.

How Does Power of Compounding Work in SIP?

Before understanding this power of compounding in SIPs, let us first understand how SIP actually works. SIP or Systematic Investment Plan is a type of mutual fund and operates on the same principle. The only difference here is the manner of investment. Unlike normal mutual funds, SIP investment plans offer you the option to make fixed investments at regular intervals. Since SIP depends on time, one specific thing to remember about SIP is that the earlier you invest, the more you get.

This regular investment increases your principal amount every year, which is further boosted by compounding. A SIP can do wonders to your investment, which you can also verify by checking it yourself on the SIP calculator. To understand it better, let’s take the example of a person who invests a meagre amount of ₹ 500 on a monthly basis for the next 10 years with a 10% rate of interest. So, after 10 years, one gets a total amount of ₹ 1, 00,728 of which only 60,000 is the invested amount, while the remaining ₹ 40,728 is the wealth gained through compounding.  

Why Choose SIP?

Apart from increasing your wealth through compounding, SIP has other benefits as well. The most important being the minimum investment. With a SIP, you can invest up to a minimum of ₹ 100 on a monthly basis. One behavioural change that you can experience with SIP is of being a disciplined investor as you have to invest regularly in the corpus.

Now that you are well-aware of how compounding boosts your capital over the long-term, it is imperative that you start with your investment from today. In case of any queries or doubt, feel free to reach out to us.

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IPO Vs FPO: What is the Difference between IPO and FPO

Both IPO and FPO are a company’s means of raising finance from the public to meet its various requirements. IPO (Initial Public Offer) means when a company offers its shares to the public for the first time. Also, the company is listed and traded on the stock exchange at this time. FPO (Follow-on Public Offer) means that a publicly-traded company issues its shares to the public. Here are some basic differences that help you help understand them better.

Issuer:

IPO is issued by a private company or unlisted company that has not yet issued its shares to the public. On the other hand, FPO is issued by a listed company that has already issued its shares to the public. It is the subsequent public issue of its shares, i.e., the second time or third time and so on.

Risk:

When it comes to risk, IPOs are riskier than FPOs. Some potential risks in an IPO includes no guarantee of getting the shares, money getting locked for some time, getting less than the offered rate, etc. However, the financial requirements of investors determine which one is better for them, depending on the benefits, even with an inherent risk.

Objective:

The infusion of capital by opening up ownership of the company to the public in the form of shares is the objective of an IPO. On the other hand, the objective of an FPO is diversification of public ownership. Through an IPO, companies have the option of raising funds either by borrowing debts or selling the stake. The next stage after an IPO that a company requires funds for is expansion. These funds for expansion can be raised through an FPO. Also, an FPO is issued for the dilution of the promoters’ shareholding.

Performance:

In the case of an FPO, you always have the option to check the track record of the company, its performance in the past, and profitability. Also, how the market behaved while its IPO was issued can be a good indicator of how the FPO will perform. But in the case of an IPO, a red herring prospectus is issued, and the decision of the investment is to be made on the basis of factors such as market interest, debt, management, etc. There is no option of checking the track record of the company offering the IPO.

Profitability:

If you are taking a higher risk, then the chances of profit are relatively higher than taking less risk or no risk. Since investing in an IPO is riskier than an FPO investment, the profitability also tends to be higher. However, the profitability in FPO is mostly associated with how the existing stocks of the company are performing.  Compensation for the risk taken in an IPO & FPO is made available to the investor by means of dividends, bonuses, etc.

In an IPO process, though there is no guarantee of its performance; you will have to research its growth prospects. You have to be aware of the upcoming IPO to make a better decision. While in an FPO, the relevant data of its prospects will be handy.

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Commodity Market Live - Online commodity prices and trading in commodities market at Motilal Oswal.

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Gold Commodity Trading

Given its unique position in the global economic and political structure, gold is often a popular choice for all types of investors. Moreover, irrespective of whether the market is bearish or bullish, the gold market provides high liquidity, as well as a lucrative opportunity to earn profits.

Considering how high the prices of gold have been in the past decade, it is beneficial if you learn a trick or two of the commodities market in India and make the most of the rising gold prices.

Here are some of the commodity tips you should know when trading in gold:

What impacts gold prices: Gold is the most traded online commodity in the world. It is critical to understand what impacts the prices of the commodity and its dynamics. The sentiment, intensity and volume of gold trade are heavily influenced by catalysts like inflation, deflation, greed or fear, as well as supply and demand.Further, gold prices are also inversely correlated to dollar value. So, when trading in this popular commodity, have a keen eye for all catalysts and make an informed decision.

The crowd sentiments: Different people prefer gold for various purposes. There are retail participants, gold bugs, institutional investors, as well as the general population. Each section purchases this online commodity for a specific purpose, which pushes or pulls the demand and in turn, the gold prices.Hence, as a trader in gold, you should understand the emotions of each category well. It is advisable to invest in gold funds, which will comprise a basket of market instruments to match your risks-and-reward expectations.

The long-term history: Rising gold prices are attractive; however, it is wiser to pause and take a decision only after an in-depth study of its historical prices. You should understand the gold prices of the last several years to decode the pattern. Apart from understanding the trends, analyse the points where the price of the yellow metal dips for a long time.The objective is to evaluate the price points that you must watch out for when trading currently. Put a stop loss when the prices hit a point you suspect is the lowest, as per historical evidence.

The technical analysis: Apart from watching out for past prices, you should keep an eye for commodity news. Study the impact of economic changes, politics, industrialisation, etc. on the commodities market in India, specifically gold.Keep yourself informed about the national updates, as well as international events. Use the historical price analysis of gold to understand which events cause prices to rise and fall, and accordingly, frame trading strategies. 

The RBI policies: The Reserve Bank of India, the governing authority for the Indian currency and the banking system, plays a critical role in gold trading. The RBI issues mandates and changes economic policies, which can heavily influence gold value.

Moreover, the RBI advises the government on issuing and restricting gold in the country. This, in turn, directly impacts gold prices. 

By being mindful of these commodity tips and you will be able to make wise gold trading decisions to suit your objective, risk profile and requirements. If all of this sounds intimidating to you, you can always seek help from professional investment advisors.