If you want to know what God thinks about money, look at the people He gives it to, goes an Irish saying.

You may argue that the genius of an N. R. Narayana Murthy is not easy to find, nor is everyone born with an inheritance of a Mukesh or Anil Ambani or even Kumar Mangalam Birla.

But you too can amass as much fortune as Narayana Murthy or Venugopal Dhoot or Vijay Mallya or Keshub Mahindra, the lowest-ranked Indian in the Forbes list of world billionaires 2007 with a net worth of $1.1 billion.

It may sound like a fairy tale, but the truth is that by saving only Rs 1,000 a month regularly you can leave behind assets worth a few billion dollar for your heirs. The magic lies in the power of compound interest, which Albert Einstein referred to as the eighth wonder of the world.

Simple formula

The compounding of an initial sum year after year even at a small rate of, say, 4 per cent makes it grow so huge that after a certain point of time people fail to realise it.

Consider this. You have been asked to start by saving one paisa on day one and, every following day, double the amount you saved on the previous day. I bet, many won’t be able to sustain this process even for a month — you would save Rs 53,68,709.12 in 30 days.

Code to wealth

This a not brainteaser. The compounding interest formula is the secret code to all wealth creation (see Table 1). The table shows that by following a simple strategy of investing Rs 12,000 every year (or Rs 1,000 per month) in assets giving an aggregate return of 10 per cent per annum a family can create as much wealth in just two generations as Narayana Murthy or Venugopal Dhoot or Vijay Mallya or Subhash Chandra has made today. In the next century, the Forbes list of world billionaires may include your grand-children’s names as well.

Twin factors

However, how much wealth you create depends on two factors — the rate of return and the period of investment. If the annual return on your investment is 9 per cent, you will get Rs 6468,36,41,170.71 against Rs 23295,12,36,351.77 at the rate of 10 per cent as illustrated in Table 1. This shows the impact of only 1 per cent difference in the rate of return on your investment.

Old is gold

So, if you are planning to invest some money in a bank fixed deposit, do it in joint name with someone in your family who is over 60. Banks are giving an annual interest rate of 10 to 10.25 per cent to senior citizens. You can shop for the rates with different banks. Foreign and private banks are giving a higher rate than public sector banks.

Invest early

Start investing at an early age. Anil, 19, starts investing Rs 1,200 every year (or Rs 100 per month) in an instrument giving a 10 per cent return per annum. He stops contributing after he turns 26. But Anil leaves his investments untouched till he retires at 60.

His friend Bimal starts investing the same amount (Rs 1,200) every year in the same instrument yielding an equal return of 10 per cent annually. But he is 26 when he begins and keeps investing till he is 60.

The result is incredible. At the age of retirement, Anil gets Rs 3,85,651.53, while Bimal gets Rs 3,24,029.24. This is despite the fact that Bimal has made a higher investment of Rs 40,800 (= Rs 1200 x 34) than Rs 9,600 (= Rs 1200 x 8) by Anil.

Don’t lose money

Don’t lose money. Protecting the gains from an investment is of utmost importance as compounding losses can be fatal. Consider this. You invested Rs 1 lakh in 10,000 units of a new mutual fund offer. In the first year, the fund gave a return of 10 per cent and the value of investment grew to Rs 1.10 lakh. In the second year also the fund generated a 10 per cent return taking the value to Rs 1.21 lakh.

In the third year the fund suffered a loss of 20 per cent. This would bring down your investment value to Rs 96,800, eroding your all gains as well as initial capital investment. You suffer a loss of Rs 3,200.

Hence a continuous monitoring of investments is necessary for wealth creation. Investments should be allocated to different asset classes so that the targeted overall rate of return is achieved year after year.