Many people work hard to earn money but struggle to grow it. Savings feel safe, but they often don’t keep up with rising expenses and can make financial goals harder to achieve. Investing wisely allows you to grow wealth over time and reduce dependency on active income. Among the best ways to achieve this is investing in mutual funds and leveraging the power of compounding. Let’s understand how in detail below.
Understanding mutual funds
Mutual funds pool money from multiple investors and allocate it across a diversified portfolio of stocks, bonds, or other securities. Professional fund managers handle these investments, which makes them suitable for new investors as well as experienced ones.
Depending on your financial goals and risk appetite, you can invest in:
- Equity funds for growth
- Debt funds for stability
- Hybrid funds for a balanced approach
- Index funds for broad market exposure
You can use both lump sum and Systematic Investment Plan (SIP) options to begin your mutual fund journey and grow wealth.
The magic of compounding
Compounding is referred to as the eighth wonder of the world due to its ability to earn returns on returns. When you invest in a mutual fund with a growth option, the returns earned plus dividends are reinvested and generate additional earnings. Over time, this cycle multiplies wealth and helps you create a huge corpus.
Suppose you invest ₹5 lakh in a mutual fund with an average annual return of 12%, compounded yearly. You plan to stay invested for 20 years. Enter these numbers in an online compound interest calculator and click on “Calculate”. The tool may generate these results.
- In 10 years, your investment grows to around ₹15.5 lakh.
- In 20 years, it increases to nearly ₹48.2 lakh.
- In 30 years, it skyrockets to over 1.50 crore.
As you can see, even without adding more money, wealth increases because of the reinvestment effect.
The sleep-well strategy: How to make money work for you
Mutual funds and the power of compounding work together to grow your wealth, even while you sleep. All you have to do is follow two key principles, i.e., consistency and patience. Now, let’s go through the steps to make the most of this approach:
Begin early
Time is the most critical factor in compounding. The earlier you invest in mutual funds, the more time your money gets to grow.
For example, if you start an SIP of ₹5,000 per month at 30 with a 12% annual return (assuming yearly compounding), you would accumulate around ₹1.5 crore by 60. But if you start at 40, the final amount drops to ₹46 lakh.
Pick growth over dividend payouts
Mutual funds offer growth as well as dividend options. To leverage compounding, select the growth option, where returns are reinvested. This allows wealth to multiply over time.
Be consistent
Timing the market with full accuracy is not possible for any investor. Instead of waiting for the “perfect moment,” it makes more sense to invest through SIPs. This strategy allows you to contribute a fixed amount at regular intervals in the mutual fund scheme of your choice.
Simply start an SIP and set up banking instructions, after which the investment amount is automatically deducted on the selected date. You don’t need to track the market or make manual transactions. Your money gets seamlessly invested and works for you, even while you sleep.
To sum up
Mutual funds and compounding together create a solid wealth-building strategy that works in the background effortlessly. All you have to do is begin early, invest consistently, avoid panic selling, and have a long-term mindset.
With mutual funds offering diversification and professional management and compounding multiplying your returns, you have a winning formula to achieve long-term financial success.
Start your investment journey now!
