You may have heard the phrase – “Money attracts money.”
That’s exactly what compounding means!
In mutual funds, compounding makes your investment expand not just on the principal you contribute, but also on the returns that your money compounds over time.
Let’s show how this powerful but simple concept can multiply your savings – even if they’re old!
1. What Is Compounding?
When compounding takes place, your wages turn into the building blocks for earning even more returns.
In other words – it’s “interest on interest.”
Example:
Invest ₹10,000 and if it grows 10 percent in one year you’ll have ₹11,000.
You make 10% not only on ₹10,000 but also on ₹11,000 next year — which means your returns ought to get even faster every single year!
2. How Compound Interest Works With Mutual Funds
Your profits (or dividends) on mutual funds are reinvested automatically.
That reinvestment is how your total investment base just keeps growing… which results in compound growth over time.
The More Time You Invest → The More You Make!
3. Power of SIP + Compounding
| Monthly SIP | Years Invested | Expected Return (12%) | Total Amount Gained |
|---|---|---|---|
| ₹500 | 20 years | ₹4.9 lakh | ₹1.2 lakh invested |
| ₹1,000 | 20 years | ₹9.8 lakh | ₹2.4 lakh invested |
| ₹5,000 | 20 years | ₹49 lakh | ₹12 lakh invested |
The trick is to invest early and stick with it.
4. Why Time Is Better Than Quantity
Because the sooner you begin, the longer your money has to compound.
A slight discrepancy in starting age, Childers said, can lead to a massive difference.
Example:
- If you begin investing ₹2,000/month at 25 and keep it up for the next 25 years → You end with ₹33 lakh.
- For example, if you start at 35 and invest for 15 years: → You get just ₹10 lakh.
That’s a difference of ₹23 lakh – simply for the fact that you started 10 years before!
5. The Golden Rule of Compounding
- Start early
- Stay consistent
- Don’t withdraw early
- Rise the SIP amount in corollary to your rise in income
Spit-forging gold from small-stakes investments now!
6. How to Make the Most of Compounding in Mutual Funds
- Opt Growth Option: Always opt for the “Growth” option and not “Dividend”, to enable reinvestment of your returns.
- Invest for 10+ Years: The longer you are in, the more compounded returns.
- Do Not Withdraw Too Often: Allow your money to work without pause.
- Increase SIP Annually: You can raise your SIP amount by 5 to 10% annually inline with your income rise.
FAQs:
Q1: What’s the Timeline to Realize Any Compounding Benefits?
Typically, it’s five to seven years in when you start seeing a significant spike – and it only continues growing more quickly from there.
Q2: May one apply compounding in all the types of mutual funds?
Yes, but equity funds and hybrid funds benefit more from long-term compounding.
Q3: Is it a good idea to manually reinvest the returns from my mutual funds?
If you select the Growth option, dividends are reinvested automatically – there is nothing you need to take action on manually.
Q4: Can I stop my SIP without affecting the compounding?
You can, just try not to take too many breaks – the longer and more regularly you invest, the greater the impact of compounding.