Since the inception of the first mutual fund, Unit Trust of India, in 1963, mutual funds have been gaining traction and have become a popular investment method. Managed by professional fund managers, mutual funds are a basket of financial instruments such as bonds, stocks, and short-term debt.
By investing in these funds through a mutual fund app, you effectively diversify your portfolio. However, if you are wondering whether these investments can accrue wealth over time, this blog is for you! Let us delve deeper into the world of compounding in mutual funds.
What is the Compounding Effect?
Compounding is the process through which the interest or profits you earn over your principal investments are reinvested. As a result, the reinvested profits and earnings generate additional earnings.
Here is an example to demonstrate the power of the compounding effect. Let’s say you are investing a total of 20,000 rupees at an interest rate of 10%. After a year, this amount becomes 22,000.
Whether you invested in a scheme generating simple interest or compound interest, the first-year returns would be the same. The magic begins after the first year; the table below depicts the total maturity amount after a period of 10 years in both investment methods.
| Investment Amount (Rs.) | Maturity Amount in Simple Interest Scheme (Rs.) | Maturity Amount in Compound Interest Scheme (Rs.) |
| 20,000 | 30,000 | 32,210.20 |
When you invest in mutual funds, your fund managers reinvest your profits into the schemes. Thus, these profits also generate earnings over time.
SIPs: The 8-4-3 Rule
SIPs are an excellent way to accrue your wealth systematically over time. You can generate large returns by starting with a small capital and investing small amounts in periodic durations. For instance, the 8-4-3 rule duly utilises the power of compounding.
Below is an example to demonstrate this rule’s effect.
If you invest Rs. 50,000 per month through a SIP plan at an expected rate of return of 12%, it would take eight years for your accrued wealth to reach 80 lakhs; however, it would only take another four years to reach approximately 1.61 crore.
Finally, by the end of the 15th year, you would have accumulated another 80 lakhs which leads to your total wealth becoming close to 2.5 crores.
How to Compound Your Wealth Using a Mutual Fund App?
Below is a series of steps to guide you through compounding your wealth using the mutual fund app.
- Assess and Research – Start the process by assessing your risk profile and then select the schemes you want to invest in.
- Choose the investment platform – Ensure that you choose the best mutual fund app that is user friendly, insightful and supportive.
- Invest – Once you choose the app and activate your account, it is time to add funds and start investing. To make your SIP investment, you first have to determine the amount of capital you want to invest and the frequency of this investment. Also, ensure that sufficient funds are maintained in your account because the money is auto-debited from your account
Conclusion
Compounding your wealth through a mutual fund app is a fairly simple process, as most of it is automated and handled by the fund managers. However, remember to do your research and assess different schemes before you pick the right one.
If you are patient and disciplined, you will find that the power of compounding will exponentially rise over the years and multiply your wealth exponentially! The longer you stay invested and allow the compounding effect to work its magic, the greater your wealth can grow. So, start early, stay invested for the long term, and let the power of compounding help you achieve your financial goals.