Compounding gains is a powerful growth strategy

• Compounding works when you allow earnings from an investment to be reinvested.
• Reinvesting gains over time leads to exponential growth.
• When an investment is allowed to compound for the long term, its potential for returns grows in proportion.

Amnah and Saleh remember when their father started their investment journey. He introduced them to the investment fund and started contributing on their behalf. By the time the siblings were in their teens, they had started receiving account statements that showed how much their original investment had grown. Their father had a simple rule – the returns from the invested amount would be reinvested every time.

This was their early lesson in the power of compounding. Simply put, compounding means that the principal and earnings from an investment are reinvested, causing the money to grow faster, due to the snowballing effect.

Reinvesting the principal and the earnings

Small amounts lead to big gains: Investing regularly and reinvesting gains increases the size of your investment without pain.

Hedge against inflation: As the cost of goods and services rises, compounding becomes an effective offset against inflation.

Increased asset value: Reinvesting the earnings from an investment makes the asset stronger.

Compounding can work for various types of investments, including Sharia-compliant funds and assets. The thing to remember is that the longer the money stays invested, the more time it gets to compound its gains, and offers greater potential for wealth generation.

How to ensure long-term growth from compounding

Be consistent: Consistency helps your investment grow so that the principal grows. Be sure to invest regularly in the chosen asset/s.

Automate reinvestment: In many products, you can automate reinvestment on maturity, while ensuring good earnings. ‘Invest and forget’ is a powerful passive investment strategy.

Invest a set percentage of your income: A good strategy to gain from compounding is to ensure you invest a set percentage of your income, rather than a set amount. This ensures that the principal grows and you get a greater benefit from compounding.

Start your investment journey early and benefit from a longer period of compounding gains.