You may have noticed Kapital Boost focuses on only offering short-term (3-9 months) funding opportunities. It is for good reasons. Doing so, provides our members with several investment benefits including:
- Increased flexibility/liquidity. You only have to wait 3-10 months before getting access to your cash again;
- Lower credit risk. It is more accurate to project a company's performance in the near term versus the long-term; and
- Ability to exponentially grow returns from a re-investment strategy
The last point is known as Compounding - the process of generating returns from an asset’s re-invested profits.
Most people associate Compounding with interest/riba. But one can also take advantage of compounding by regularly re-investing in short-term investments.
To demonstrate, let's compare the return on a 5-year investment offering a 60% profit versus a 6-month investment offering a 6% profit.
While annualised returns for both investments are 12%, the 6-month investment if continuously rolled-over, will offer a higher return of 79% in 5 years. This is because accumulated returns at the end of every six months, when re-invested, generate additional profits unlike a straight five-year investment.
To provide more clarity, we provide the return calculation for each of the investments below.
Year 0: $1,000
Year 5: $1,000 x 1.6 = $1,600 (60% of the original investment)
Year 0: $1,000
Year 0.5: $1,000 x 1.06 = $1,060
Year 1.0: $1,060 x 1.06 = $1,124
Year 1.5: $1,124 x 1.06 = $1,191
Year 2.0: $1,191 x 1.06 = $1,262
Year 2.5: $1,262 x 1.06 = $1,338
Year 3.0: $1,338 x 1.06 = $1,419
Year 3.5: $1,419 x 1.06 = $1,504
Year 4.0: $1,504 x 1.06 = $1,594
Year 4.5: $1,594 x 1.06 = $1,689
Year 5.0: $1,689 x 1.06 = $1,791 (79% of the original investment)
The earlier, the better
To take advantage of Compounding through short-term re-investing one should invest early. Over time, $1,000 invested today and constantly rolled over in 6-months investments is going to grow at an exponentially higher rate versus $1,000 invested in the same assets one year later with similar re-investment strategy (see chart below). This is because, the accumulated profits in the earlier investments results in a faster growth in quarterly profits.
Boost your money, grow the community
Stay tune for more small business funding opportunities by Kapital Boost (www.kapitalboost.com). We are gradually increasing our funding campaigns. This should make it easier for our members to execute the Compounding strategy discussed above, in the near term.
Don’t look at your investment through Kapital Boost solely as a way of growing your money. It is also growing the community.