Mutual Fund SIP Plans can be great investment vehicles for the long term as they provide you with opportunities to benefit from the power of compounding.
Albert Einstein has famously termed “Compounding” the eighth wonder of the world because if done correctly, it can be the golden key that opens the door to financial freedom for you.
What is Compounding?
Compounding is the reinvestment of the interest or any other amount that you have earned on your principal investment amount. When you continuously re-invest the earnings on your principal, you invest a higher amount every year. This investment amount keeps increasing as you keep re-investing the earnings. This is how long-term investment strategies are made effective by the power of compounding.
How does Compounding Work in Mutual Funds?
When you invest lump sum amounts in Mutual Fund Plans, compounding is done by reinvesting your dividends (earnings on your investment). Your dividend amount is used to purchase additional units. This process is repeated throughout the investment term you have chosen.
If you wish to incorporate compounding in HDFC Mutual Funds or any other Mutual Fund of your choice, you have to select the “dividend reinvesting option” in your application form.
How does Compounding Work in Mutual Fund SIP Plans?
In Mutual Fund SIPs, you don’t make lump sum investments but invest at regular intervals- either monthly, quarterly or annually for the duration you have chosen.
Due to the effects of compounding, the amount on which you earn your monthly interest keeps increasing as your principal amount increases. What you get is an exponential growth on your investment!
This exponential growth is the so-called “Magic of Compounding” in long-term Mutual Funds.
Getting Time on your Side: Investing early in Mutual Funds for the Long Term
If you begin investing early, time is going to be by your side and you stand a chance to reap the greatest benefits of Compounding.
When you invest early, you also don’t need to invest huge amounts to achieve your financial goal as Compounding will do most of the work for you, provided you give your investment enough time to grow.
It is believed and proven that all good things come to the one who waits. So, choose a good Mutual Fund, invest regularly and be patient to have your own financial success story.