The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.
Suppose, you invest ₹ 10000 in an SIP which offers 10% interest per annum. Your investment becomes ₹ 11000 after the first year, then ₹ 12100
after 2nd year and so on.
Compound interest allows your balance to grow faster than simple interest, which only takes the principal amount into account. It's easy to increase your compound interest as a mutual fund investor. The more money you invest and the longer it sits, the more it grows
Compound Interest Adds up Fast So how does compound interest factor into mutual funds?
Compound interest is paid on the accrued interest you earn. Therefore, it is calculated on the principal amount plus any additional deposits and interest. You can also think of it as interest on interest. Compound interest allows your balance to grow faster than simple interest, which only takes the principal amount into account.
It's easy to increase your compound interest as a mutual fund investor. The more money you invest and the longer it sits, the more it grows. Choosing to reinvest your fund's dividends also better your chances of earning more compound interest. That's because you purchase more shares of the fund when you put the distributions back into it. More compound interest accumulates over time, and the cycle of purchasing more shares will continue to help the fund, and one's initial investment in it, grow faster in value.
The Bottom Line
Compound interest is one of the simplest and most useful concepts in finance. But you don't have to be rich or a trading whiz for it to work in your favor. You merely have to understand the time value of money and start investing as soon as possible. The principle works the same whether you invest $20 or $20 million. By adding the interest earned back into the original capital investment, the mutual fund's value grows at an increasing rate.
For knowing more how you could grow your wealth using the power of compound interest please ping me.
Sreekanth Pillai
+971503963193
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