There is a lesson to be learned everywhere and from everything. From sports to travelling and theatre, every situation, event, and industry has something to teach you. Financial markets are no different, with lessons waiting to be learned one way or another. While you can learn a lot about money management from various segments of the financial markets, the concept of compounding benefit is, by far, the best teacher.
Also called Power of compounding, it has many lessons up its sleeve. It is up to you to grasp the teaching and use it effectively to accumulate wealth. But before we get into the lessons, let us brush up on the concept of compounding benefit.
What is the benefit of compounding?
Compounding benefit is a simple yet powerful concept that can multiply your money manifold as you earn money on your returns as well as the principal amount. For example, let us assume you invested ₹1000 in a mutual fund, and it earns ₹100 in the first year. Since mutual funds offer compounding benefits, you will earn returns on your invested sum, which is ₹1000, as well as on your returns from the previous year, which is ₹100 in this case. Essentially, if you generate 10% returns in year 2, you’ll earn ₹110 (i.e., 10% of (₹1000 + ₹100).
Since the returns are reinvested, it creates a sizable corpus in the long run. You can use the power of compounding calculators to see how compounding of interest aids in wealth creation.
Lessons from compounding benefit
Compounding benefit is a powerful tool for multiplying money. However, it also offers some invaluable lessons that can help you enhance your outlook towards investments. Here are a few of them:
Age matters
Age counts for nothing if you are chasing your dreams. But when it comes to using the power of compounding calculator for your investments, your age is a critical factor affecting your future net worth. If you use the power of compounding calculator, you will learn that the earlier you start leveraging the compounding benefit, the better it will serve you down the line.
An individual who begins investing in mutual funds at the age of 20 will accumulate a more considerable corpus than someone who starts at 25.
Patience is key
Compounding values patience. It rewards investors handsomely if they manage to hold on to their investments for a long time. While you may attempt to stay invested in mutual funds —for as long as possible, you should ideally remain invested for at least a few years.
The power of compounding calculator can demonstrate the benefit of doing this. When you stay invested for longer, your investment has more potential for appreciation, which will create a substantial wealth corpus over time.
Always have an asset allocation/financial plan
There are many advantages of investing in mutual funds, one of which is learning the importance of having a financial plan. It stresses optimal asset allocation to ensure maximum exposure to the right asset class and diversify your investments for ensuring minimum dependence on a single mutual fund scheme. You may choose mutual fund schemes that suit your risk profile and use the power of compounding calculator to evaluate the expected returns you can get from them.
Wrapping up
Compounding benefit is a significant advantage of investing in mutual funds. It is the reason why mutual funds have become an appealing choice for both new and experienced investors. Grasping the concept is vital as the lessons can help create the wealth you need.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
The power of compounding calculator results are for illustration purpose only. Please get in touch with a professional advisor for a detailed suggestion. The calculations are not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as a promise on minimum returns and/or safeguard of capital. While utmost care has been exercised while preparing the calculator, NIMF does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the calculator. The examples do not purport to represent the performance of any security or investments. Given the individual nature of tax consequences, each investor is advised to consult his/her professional tax/financial advisor before making any investment decision.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
