Compounding is a powerful financial concept in the field of investment and finance, and understanding it is the key to successful investing. Compound interest is when the interest that accrues on an investment is added to the principal and from that point onward, the interest is earned on both the principal and the accumulated interest. This “compounding” of interest allows investors to grow their wealth exponentially over time, and it is one of the key drivers behind long-term financial success.
But can the power of compounding make you rich with your mutual fund investments? Know here.
Power of compounding in mutual funds
Mutual fund investments can be a smart strategy for those looking to maximise the power of compounding. With a long-term investment horizon, investors can benefit from the fund’s strategy of reinvesting returns in the form of capital gains. This can lead to steady growth over time, as each new gain adds to the overall value of the fund units.
For example, let’s say you invest Rs. 1,00,000 in a lump sum at an annual rate of 10%. After one year, you will have earned Rs. 10,000 in interest. But in the second year, you will not only earn interest on your original investment of Rs. 1,00,000, but you will also earn interest on the Rs. 10,000 that you earned in the first year. This compounding of interest continues year after year, and it can have a profound effect on your investment over the long term.
Moreover, investors also earn dividends on the funds they invest, which could be on a monthly, quarterly or annual basis. You can either withdraw the dividend or reinvest it into the mutual fund to increase your investments and allow the principle of compounding to work for you.
How to leverage the power of compounding to become rich?
- To utilise this,the power of compounding calculator is an essential tool to understand how your investments could grow in years or even decades, allowing you to assess various scenarios and evaluate risk versus reward.
- Resist the urge to withdraw your initial investment or the interest you earn from it unless absolutely necessary.
- To maximise the power of compounding, it is important to start investing early and reinvest your earnings back into your investment portfolio. For example, if you start investing at age 25 and continue to invest until age 65, then you will have 40 years for your money to grow. However, if you wait until age 35 to start investing, then you will only have 30 years to compound your money.
- Invest and monitor your investments regularly. An ideal way to take advantage of the power of compounding is by investing in mutual funds. Because they offer a wide range of investment options and also allow you to set automatic contributions, mutual funds make it easy to build wealth steadily over time.
Last remarks
Note that achieving real wealth from compound interest isn’t just about investing in mutual funds and then waiting for the money to accumulate. You will need to invest consistently over an extended period of time and carefully select the funds before investing so that your investment gains maximum growth through the power of compounding.
