Compounding, touted as the eighth wonder of the world, is a powerful concept that has a multiplier effect on wealth creation. If done correctly, it can help corporates swell business profits manifold. However, the question is how business owners can put this concept into practice through their investments. The answer is through mutual funds. Let’s understand how you can benefit from compounding through this asset class.
What is Power Of Compounding?
Simply put, power of compounding refers to the interest you earn on interest. Let’s understand it with an example. Suppose you invest ₹1 lakh with 12% interest every year, the principal amount is ₹1 lakh and the earnings at the end of the year ₹12,000.
If you reinvest this amount at the end of the year, your principal becomes ₹1.12 lakhs, and your earnings in the second year are ₹13,440 (12% of ₹1.12 lakh), which is ₹1,440 higher than the previous year. The amount may look small, but when done for a continuous period, it makes a huge difference (see image).
How Can Corporates Benefit From Compounding Through Mutual Funds?
- Stay Invested For a Long Period
The key to taking advantage of mutual fund compounding is to begin early and stay invested for a long time. Time plays a vital role in compounding (see table below).
As you can, the longer you stay invested, the greater the final corpus. So, ensure you stay invested for an extended period to leverage the power of compounding.
- Don’t Exit Following Short-term Volatility
Being market-linked products, returns from mutual funds vary and depend on market performance. Market movements are never linear, and they are unpredictable. When they aren’t performing well, it’s essential to be patient. If you redeem, you don’t get the benefit of compounding. Time and again, markets have rewarded those who have been patient with their investments.
This is where business money investment in ELSS, among several mutual fund options, can work in your favour as the mandatory lock-in period of 3 years, during which you can’t redeem, gives time to grow your money.
- Be Disciplined With Your Investments
Discipline helps you succeed in every walk of life, and mutual fund investments are no different. To harness mutual fund compounding, you must be disciplined with your investment and ensure you don’t miss the opportunity to invest. As a corporate, regularly investing business idle cash over weekends and holidays in mutual funds can help generate decent returns on investments.
With mutual fund compounding, you can create wealth and seamlessly boost business profits. By starting early and remaining committed to your investment, you can make a real difference to your revenues in the short and long term.
Summing Up
With mutual fund compounding, you can create wealth and seamlessly boost business profits. By starting early and remaining committed to your investment, you can make a real difference to your revenues in the short and long term.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
