How Can Compound Interest in Mutual Funds Make You Rich
Compounding is simply the interest earned on interest. This earning on the interest leads to substantial growth in investments and savings. So, even a smaller initial investment amount can fetch you higher wealth accumulation provided you have a longer investment horizon of say 5 years or more.
Mutual funds are designed in such a manner that they harness the power of compounding. As an investor, you will make gains when the value of each unit of investment goes up. When you make investments over a long period of time, the benefit of compounding helps you grow your investment. This is particularly the case in mutual funds because the money that is generated in the form of capital gains is reinvested to create additional returns.
You may choose to invest INR 1000 every month in a mutual fund for the next 10 years and at a rate of 8 percent per annum. So, you will notice that your investment of INR 1,20,000 in 10 years’ time gave you a return of INR 1,82,946. Now if you choose to invest it further for say another 10 years, the money now reinvested will grow even faster and give you INR 3,94,967. This is the special thing about compounding where the existing investment, along with the returns on this investment and the new investment each month, all contribute towards further gains.