How A Mutual Fund SIP Compounds Over Time?

You would have likely read thousands of articles on how investment in stocks helps you in maximizing your money in the long run. The big question you must ask yourself here is whether you know the stocks to buy, especially if you are an inexperienced first-time investor in the stock markets. This is where mutual funds investment has made it easier, especially for first-time investors with no knowledge of the stock markets. What’s made them popular is the fact that you can start SIP online without much effort. All you need is a Demat and a trading account along with a bank account and you can buy/sell mutual fund units with ease. Let’s now look at how a mutual fund SIP compounds over time.

When your returns start earning returns in turn, it is called compounding. It is very simple to visualize in case of fixed income securities such as FDs where the interest that you are getting is fixed. The investment is fixed. Let’s say you have a recurring deposit of Rs.10000 per month compounding at 8% p.a. for a duration of 16 years and 1 month. You will start seeing that the returns you get start earning more returns through the compounding effect.

In case of a market-linked investment options such as a mutual fund, let’s see how the compounding works. Let’s say you have a SIP of Rs.10000 per month in a top large-cap fund. Let’s assume the SIP duration is Jan 01, 01 to Jan 01, 2017. In the case of RDs, the returns were fixed. Hence, it was easier to calculate the compounding effect. However, in case of a mutual fund, the returns are market-linked and thus, are not fixed. The compounding effect will be absolutely prominent and visible when you track the NAV of the MF over the long run during the entire investment duration.

The value of investment in case of MF moves in tandem with that of the NAV. At any time the value of your investment will be the outstanding units you have of that particular fund multiplied by its NAV. A fund’s NAV is a reflection of its portfolio, which could hold stocks, certificate of deposits, corporate debt, etc. The thing you need to remember is that your portfolio cannot remain constant. It keeps changing. The fund manager will sell stocks that have gained to book profits. Some corporate debt and certificate of deposits will mature and you would get the corresponding interest. This is how a fund’s portfolio swells. The gains made via the selling of stocks or interest received is reinvested into better securities on your behalf. This is how the portfolio of your fund grows. Thus, this gets reflected in the NAV of the fund.

With a disciplined approach towards investments by ensuring month-on-month investment in MF SIP, you will surely benefit from the compounding effect as your portfolio keeps swelling as explained above. 

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