Revisiting compounding- Supposedly the 8th wonder of the world
Finamily ensures support across the 3 legs of compounding
Esteemed Readers,
By now, you must have come across various examples and stories highlighting the power of compounding. Whether it's the unverified Einstein quote, the tale of the king, rice, and the chessboard, or the concept of 1.01^365, all these stories emphasize the remarkable potential of compounding that is often hard to comprehend.
As Finamily aims to assist clients in compounding their wealth, I wanted to break down the formula and demonstrate how we add value. Similar to Chuck Akre's three-legged stool analogy, compounding can also be envisioned as a three-legged stool.
Let's revisit the formula we learned in class 8: A = P * (1 + r/100)^n. There is one output variable, A, which is influenced by three input variables: P (Principal), r (Rate of Return), and n (Time Period).
Now, let's translate this into investment language and understand its significance:
P = Capital Allocation
r = Choosing the Right Instrument
n = Staying Invested during Tough Times
How does Finamily help?
Let's delve deeper into how Finamily assists its clients in each of the three variables mentioned above:
Capital Allocation (P):
Capital allocation, or how much you choose to invest in Mutual Funds, is more important than the returns you generate from selecting the right instrument. Allow me to provide an example: If you have a total of 100 rupees and you only invest 1 rupee in MF, even if it yields a tenfold return, your overall portfolio has grown by a mere 10%! Therefore, at Finamily, we emphasize the significance of implementing a sound capital allocation strategy based on your goals and risk profile. Having adequate exposure to equity mutual funds, aligned with your goals and risk tolerance, is typically essential for achieving your objectives efficiently.
Choosing the Right Instrument (r):
Consider the difference between 10 lakhs after 20 years in a Fixed Deposit (FD), which becomes 25 lakhs, and 1 crore in equity. The scale of difference, four times, is primarily due to the variation in returns. Even among the best and worst performing mutual funds, there can be a substantial difference of over 5 percentage points. Not all mutual funds deliver consistent performance, so it becomes crucial to select the right ones at any given time. Finamily assists you in identifying the appropriate mutual funds through a straightforward process. We don't claim to possess superhuman AI capabilities. Instead, we evaluate past performance using rolling returns rather than trailing returns. Additionally, we examine the behavior of the fund house in previous cycles. Lastly, we seek to understand the source of returns, such as excessive trading or extraordinary performance from a single stock, to assess the sustainability of future returns.
Staying Invested during Tough Times (n):
Believe it or not, I consider this to be the most significant value we bring to the table at Finamily. In today's era of abundant information from finfluencers, news channels, and other sources, the noise has become overwhelmingly loud. While these sources may have been helpful in the first two steps, the excessive noise often hinders investors from making rational decisions. As a result, investors' behavior can become their own worst enemy. Finamily assists you in maintaining the right mindset, ensuring that you don't disrupt the compounding effect. I don't claim to possess unique insights into market timing, but rather hope to dissuade you from selling during times of negative sentiment.
In conclusion, by providing these services, Finamily aims to justify the 1% management fee collected, ensuring that you confidently compound your wealth. Our goal is for you to earn more money than you would have if you had not partnered with Finamily.
The author is a conflict free Mutual Fund Distributor. He runs Finamily that helps families invest in Mutual Funds. To avail the services of Finamily, reach out @ kevinnash.avinash@gmail.com or whatsapp on 7829311076.