How Does Magic of Compounding Works In Mutual Funds? Explained

Compounding is a fascinating term that takes 15 mins to learn and years to understand. Today we're going to explain it. In this article, we're going to explain how compounding in mutual funds can make you richer than you can imagine.

Keep reading...

Once upon a time, there was Rahul who was a diligent saver. Every month, he set aside Rs. 5000 from his hard-earned salary. Instead of letting his money sit idle, Rahul wanted to make it grow and lead a comfortable life. But he faced a dilemma - where should he invest his savings?

On one hand, there was a fixed deposit option offered by his local bank, which promised a steady and secure 6% return every year. It seemed safe and familiar, like a warm and cozy blanket. On the other hand, there were mutual funds, which had the potential to grow his money at an exciting rate of 12% per year. But the idea of mutual funds sounded unfamiliar and somewhat risky to Rahul.

Curiosity got the better of Rahul, and he decided to explore the magic of compounding with mutual funds. Compounding, he learned, was like a powerful spell that made his money grow exponentially. The returns he earned on his investment didn't just add up; they also earned more returns over time. It was like a snowball rolling down a hill, getting bigger and bigger with each turn.

After 3 years, the difference between the fixed deposit and mutual funds didn't seem significant. Till now he had slowly and steadily invested 5000 per month and a total investment of 3,00,000 in fixed deposits and 3,00,000 in mutual funds. The total corpus was 350,546 in fixed deposits (therefore 50,546 of return) whereas in Mutual Funds 4,12,432. (112,432 return). Rahul wondered if he had made the right choice. But he was patient and persistent, and he let the magic of compounding work its charm.

As the years passed, Rahul started to witness the true power of compounding. His investment in mutual funds began to flourish and outshine the fixed deposit. The growth was slow at first, but with time, it became evident that his decision to explore mutual funds was paying off.

It now has been 20 years since Rahul was diligently investing, and now the corpus looked like this, 23.21,755 in FD and 49,95,750 in mutual funds. The magic of compounding had transformed his modest savings into a bountiful fortune. The difference in returns between the fixed deposit and mutual funds was staggering.

Rahul's story serves as an essential lesson for everyone - the importance of making your money work for you. By investing wisely and allowing the magic of compounding to take effect, even a small amount of savings can grow into a substantial sum over time.

Compounding in Mutual funds kicks in long term only. So as investors, we need to make sure that we do the following:

1. Investing in an affordable amount

2. Invest regularly

3. Invest in long term

So, dear friends, don't let your money sit idle in a safe but stagnant place. Venture into the world of investing and mutual funds. Start small, stay committed, and be patient. Let the enchanting power of compounding weave its spell on your investments. Happy investing, and may your savings grow like magic!

The views and opinions stated in the content belong to CFA Aditya Goela, Co- founder of Goela School of Finance.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.