Which are the top consistent compounding stocks in India right now?
These companies are ranked as per their share price performance, 5-year profit compounded annual growth rate (CAGR) and their 5-year sales CAGR.
These companies also maintain low debt levels, have strong return ratios and cash flows.
What are consistent compounding stocks?
Consistent compounding stocks are companies whose share price has grown over time as the market has rewarded them for their consistent performance.
They come with clean accounts, prudent capital allocation, and strong competitive advantages, making them the perfect low-risk route to generating long term wealth.
They have also shown a consistent increase in revenue and profitability over a long period.
What do you mean by compounding?
Compounding takes place when you are able to earn interest on your interest, as well as your principle, which increases your total savings.
So basically, compounding is the process of earning interest on your interest. It is a way to grow your money faster than it normally would.
Here's an example...
Suppose Ram and Mohan both invest Rs 50,000 each in an investment avenue that offers interest rate at 10% per annum. The time duration is 10 years.
Ram chooses simple interest while Mohan chooses compound interest.
At the end of 10 years, Ram would have turned that Rs 50,000 to Rs 1 lakh. Mohan on the other hand would have turned that initial Rs 50,000 into Rs 1.3 lakhs.
In Mohan's case, the interest earned each year was re-invested along with the principal to calculate the interest for the next year.
It should be noted that the Indian stock market has gone up a huge 500x over the last 40 odd years. This is a compounded annual growth rate (CAGR) of around 15%-16%.
What are the key rules to follow to see the 'true' power of compounding?
Here are some rules you should follow if you want to see the magic of compounding.
#1 Start investing as early as possible. This way, you can create a solid base for your corpus to grow and expand in the future with the help of compounding.
#2 Raise your investments by controlling your expenses. The power of compounding will work whether you invest Rs 10,000 or Rs 50,000. However, if you invest a substantial amount, the interest you earn also increases significantly.
#3 Have patience. Wealth creation is a slow process.
Once the corpus reaches a tipping point, you will start seeing a marked difference. The corpus will grow substantially with each passing year past this point.