A Case for Compounding

Since Muslims do not want to deal with interest, the discussion on compounding hardly ever comes up. Usually, compounding is always mentioned in the context of interest or usury. But, the fact is, compounding is a concept which stands on its merits. Any investment that generates positive returns which is then reinvested, will make the investment grow. Compounding is the way to build wealth.

Let’s understand the concept first. If an investment portfolio has an expected return of 10{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b}, it will be at 110{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} after one year. If there are no withdrawals, the investment will be worth 121{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} after two years and so on. This investment in a 10 year period will be worth 260{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} of original and grow to 1,745{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} in a 30 year span.

The growth is even better if new money is added to the investment every month. For example, a $1,000 investment growing at 10{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} a year, with $100 added to it every month, compounded monthly, will be worth $23,000 in 10 years. Same investment will grow to $245,000 in 30 years. Use the retirement calculator on this site to see the effect.

Now, how do we translate that to a Sharia Compliant investment. It is simple. Take any of the compliant funds, for example, Amana Income Fund (AMANX). This fund has grown at approximately 10{decebffaf8f25eb0a85c221f62bbc22c324e812b773b74c7945f3fd99473db6b} a year for last 10 years. So, the above calculation for a 10 year investment span can be applied to AMANX. The calculations shows that a $1,000 initial investment, a $100 monthly add on, would have reached about $23,000 in a 10 year period.