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Learn the Power of Compounding in Mutual Funds

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Compounding refers to the increase in the value of an investment due to the interest earned on the principal as well as the accumulated interest. The concept is clear when you invest a small amount for a long-time and successfully build a huge corpus. You can use a compounding calculator in India to know the value of your invested funds.

Understanding the Concept of Compounding

Compounding is visible when you invest a particular amount for a certain period and agree to reinvest the interest earned on it. This concept leads to an appreciation of the value of your investment. A mutual fund growth scheme calls for reinvesting your interest or profit earned on the original investment thereby leading to further interest income. And this chain reaction or the multiplication of investment continues till the time you remain invested in that scheme.

You can invest in mutual funds in two ways: first by investing a lump sum amount and second through a systematic investment plan or a SIP option. The latter works by taking advantage of the compounding effect and delivering good returns. So, when you choose the SIP option you invest a small sum of money at pre-decided intervals. This invested money plus the interest earned on it is reinvested for the full duration of the SIP thereby resulting in exponential growth of your investment. This compounding effect is beneficial for people looking to build a retirement corpus or an education corpus.

But what happens if you decide to enhance the value of your SIP? Most mutual funds allow you to start another SIP if you wish to invest additional funds due to an increase in your salary or reduction in expenses. Some funds even allow you to enhance the value of your ongoing SIP. The Step-up SIP calculator can help you find out the growth in your SIP investment if you raise your investment. This tool is very useful in helping you plan your future investments to meet your set goals.

How to Reap the Benefits of Compounding?

Since compounding works by reinvestment of your earnings on the previous investments, you tend to benefit more if you stay invested for long. The longer is the duration of your investment, the more you benefit from the compounding effect.  Some thumb rules for investing in mutual funds and benefitting are:

  • Start Early - The earlier you start investing, the more you benefit from compounding.
  • Be Regular and Step-up if Possible-Another way to get the maximum out of your investments is to be regular and disciplined. You should also try to step up the investments whenever you have some additional income.
  • Stay Invested for Long-term-By staying invested for long you are allowing your investments to grow. So, avoid closing your SIPs or selling your investments early. Patience is the key to earning well and creating wealth.

To conclude, compounding is a powerful tool that allows you to maximise your earnings by starting early and staying invested for long. You can use a compounding calculator in India to decide the amount to invest to achieve certain goals.