The Power of compounding. A Ugx 300K investment path to Ugx 700 Million Nest.

April 3, 2024

Apr 03, 2024

Friends,

Many of you have asked to compute and show you the path of investment in the Treasury bonds using small amounts like UGX 300K. In this article I show you the incredible power of compounding and staying true to an investment goal for the longest time post.

If you're 25 years old, with the ability to save UGX 300K per month, investing in bonds and committing to this investment for a year could yield great results. This commitment would result in a total investment of UGX 3.6 million in principal. Within the first year, you are expected to earn a minimum of UGX 270K in coupon income.

Yield of the 10-year bond for the last 5 years consistently being above 14% and projected to remain so in the next 10 years. (For the past 10 years, The 10 year bonds have offered coupon rates above 14% and it’s anticipated to continue to be the same for the next 10 years, so this has factored into the projections)

For a Young person, time is your greatest asset to Maximize Investment compounding. Play the Long-term game. So, invest like you will need that Money 20- 30 Years from now, invest like you are investing for your Grand kids.

Furthermore, if you're younger, you still have a substantial amount of time left to make such investments. My advice would be to invest primarily in long-term bonds lasting 10 years or more, offering high coupon rates and only charging 10% Withholding Tax (WHT). (Bonds of 10 years plus offer the highest coupons and charge the lowest tax, thus giving you an opportunity to maximize return. a 14.375% 10 Year bond has 10% tax thus giving u an annual yield of around 12.9%. a 15 year Bond with 16% coupon at 10% tax gives you 14.4% net return)

Alternatively, if you desire more accessible funds (Liquidity and emergency Investment goals), invest in a Unit Trust like the Old Mutual Investment Group Umbrella Trust fund. For the past decade, this fund has yielded an average return to it’s investors of about 11% per annum.

If you dedicated yourself to investing that 300K monthly in the Old Mutual Umbrella Fund, you'd have invested a total of UGX 3.6 million by the first year and would have earned a total of UGX 211K in that same year.

UAP Umbrella Trust Fund has consistently provided an average of 11% since inception.

Assuming you begin your investment journey on your 25th birthday, by the time you're 26, you'll have UGX 3.87 million in the Bond or UGX 3.81 million in a Unit trust.

To build a robust portfolio in treasury bonds, reinvest all the coupon payouts. Likewise, in a Unit trust, avoid withdrawing the funds prematurely. Continuing this investment habit, by your 27th birthday, you'll have UGX 8.2 million in bonds and UGX 8 million in your Old Mutual Umbrella Fund account.

The choice between bonds and Unit Trusts often boils down to your liquidity needs. If liquidity is a critical factor for you, Unit trusts are a superior choice, as you can access your money within 24 hours from most Unit Trust funds in Uganda. Conversely, if your main goal is to maximize returns, you'll be better served by investments in Treasury bonds as those above 10 years might even help you make as high as 14% per annum in returns.

By your 30th birthday, following five years of steady UGX 300K monthly investment, you'll have UGX 25 million in bonds or UGX 23 million in a Unit trust account. It's the starting time to think about diversification, perhaps buying your first piece of land.

Suppose you decide against withdrawing any funds and continue investing past the age of 30. By the time you reach 40, you'll see significant growth in your investment, with close to UGX 150 million in bonds and about UGX 133 million in a Unit trust account. This would bring you an income of over 1 million per month from either investment of Unit Trusts or Treasury Bonds. That’s 1 UGX Million per month in passive income.

When you hit 50, your investment portfolio would be substantial, boasting close to UGX 700 million in bonds and UGX 500 million in a Unit trust, supplemented with a monthly income of about UGX 6 million and UGX 4.5 million, respectively.

This is the power of compounding while Investing in the capital markets; a testament to the astonishing results a disciplined investment approach can yield.