How does mutual fund compounding work?

Mutual fund compounding is like earning interest on interest. When an investor invests in a mutual fund, the returns are reinvested, creating a cycle of continuous growth. Over time, this compounding effect amplifies overall investment, leading to a significant wealth effect.

Mutual fund Compounding can make you rich by leveraging time. The longer you stay invested, the better the compounding. Earnings on principal invested and also on accumulated returns.

Let’s compare returns with different effects

Investor A : Invested with compounding effect.

Investor B : Invested at a simple interest rate.

		Investor A	Investor B
Investment Value (₹)		100,000.00	100,000.00
Expected ROI		12.00%	12.00%
Tenure (in years)		10	10
Return (₹)		310,584.82	120,000.00
Total Future Value (₹)		410,584.82	220,000.00
Difference		190,584.82

Formula to calculate CAGR:

FV – Future value of investment (amount)

P– Initial investment value (principal)

r– Expected rate of interest (in decimal for eg. 0.12, if 12%)

n– no. of times investment gets compounded (say,once in a year)

t– investment horizon (in years)

For instance, 

Investor invests Rs 10,000 (one time investment) for 10 years at an expected return 10% (compounded annually), future value of this investment would be- 

Let’s look in a simple way

No. of years	Opening Balance (₹)	Interest accrued (₹)	Closing balance (₹)
1	10,000	1000	11,000
2	11,000	1100	12,100
3	12,100	1,210	13,310
4	13,310	1,331	14,641
5	14,641	1,464.10	16,105.10
6	16,105.10	1,610.51	17,715.61
7	17,715.61	1,771.56	19,487.17
8	19,487.17	1,948.71	21,435.88
9	21,435.88	2,143.58	23,579.47
10	23,579.47	2,357.94	25,937.42

Also Read : What is XIRR?

conclusion

Compounding is a powerful tool for growing your investments over time, and understanding how it works can significantly enhance your financial strategy.

At Mutualfundwala, we offer insights and resources to help you leverage the benefits of compounding through mutual funds. If you’re eager to see how compounding can work for you or need assistance with optimizing your investment approach, our team of experts is here to help.

Contact Mutualfundwala today to explore strategies that maximize your returns and achieve your long-term financial goals with confidence!