What Do You Mean by Power of Compounding in Mutual Funds?

Power of Compounding

The power of compounding is reinvesting accrued profit. This effect of regular investment of a small amount of money can accumulate a huge corpus over time. The interest earned on the principal is reinvested in the same investment and the earnings in the following year would be added to the original amount. It is as Benjamin Franklin once said, “money makes money; and the money that makes money makes money.” Use power of compound calculator to get an idea of the returns to be able to park money as per your long-term and short-term goals.

Compounding is a prominent accelerator for increasing wealth. The ROI tends to grow at a geometric rate rather than an arithmetic rate. It is hailed as the ‘eighth wonder’ by Albert Einstein since it can make a sizable difference to the end corpus. Read on to understand what is the power of compounding in mutual funds.

How Does It Work?

Profits on investment tools like mutual funds in India are based on compound interest. For instance, you have invested ₹10,000 @ 8% per annum. The interest for a year would be ₹800. But when the interest will be re-invested, the earnings in the next year would accrue on the original investment of ₹10,000 along with the additional investment of ₹8,000.  It means the capital gain for the second year would be ₹864. The interest for the years will keep increasing as years pass with added investments annually.
The longer you stay invested, the better compounding works. Also, the earlier you begin, the more time you have for the investments to grow. The interest will be compounded monthly, quarterly or half-yearly depending on the mutual fund scheme. It helps maximize your returns and may help to reach your financial milestones earlier than expected.

What are the Benefits of Compounding?

The power of compounding in mutual funds helps your money grow exponentially. It is true even when you have a running SIP of as low as ₹500. Investors can build an emergency, education, travel or a retirement bucket. It is a good idea to arrive at the final value with the power of compound calculator. Below are a few other significant benefits.

  • Helps keep up with inflation even when the value of money erodes.
  • Bridges the gaps or shortfall in your corpus.
  • Grows the money at a faster rate than simple interest
  • A chain reaction of investment multiplication occurs.
  • Do not have to invest a lump sum amount to get started.

After picking mutual funds to invest in, consider compounding daily rather than monthly. This is because the shorter the term, the more interest you can earn. Try to be regular to ensure a healthy portfolio. Patience is another key ingredient of wealth creation when it comes to mutual funds. Let the investment grow at its pace. Years of dedication and discipline from an early age instead of postponing can help reach your goals seamlessly. You will gain when the fund units increase. Work with financial advisors to avoid loopholes.