Have you ever wondered what is the key to long term wealth creation? Is this picking the right stocks only? Or is it something to do with investing into diversified mutual funds which minimise the risk? Well, it is certainly an interplay of several factors but what really can be a gamechanger is ‘compounding’.
Compounding is so potent a factor with respect to wealth creation that it is referred to as ‘magic’ for the benefits it offers, and rightly so.
This is a magic pill which is seen as a pre requisite to allow your investment to grow. Even if you have zeroed in the best stocks, you will need to keep your money invested for a long duration in order for compounding to kick in.
To encapsulate the power of time instead of timing, legendary investor Warren Buffett once famously said, “You can’t produce a baby in one month by getting nine women pregnant.”
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In order to demonstrate the benefits of compounding, we have randomly selected one mid cap mutual fund scheme i.e., HSBC Midcap Fund, which has delivered good returns since the launch of fund.
We suppose that the investor was consistent in investing ₹10,000 every month via the SIP route into this mutual fund scheme.
This means in a year’s time, the total investment would have accumulated to ₹1.2 lakh. But this investment would have swelled to ₹1.55 lakh, the figures on HSBC Mutual Fund’s The Asset reveal.
| Tenure | Return (%) | Investment (Rs) | Return (Rs) |
| 1 year | 58.71 | 1.2 lakh | 1.55 lakh |
| 3 years | 29.95 | 3.6 lakh | 5.52 lakh |
| 5 years | 26.69 | 6 lakh | 11.58 lakh |
| 10 years | 16.95 | 12 lakh | 28.85 lakh* |
| Since Inception | 17.76 | 23.6 lakh | 1.76 crore |
(Source: HSBC Mutual Fund The Asset April 2024)
(*Morning Star Calculator)
Similarly, if an investor had continued the SIP for 3 years, the investment would have grown to ₹5.52 lakh by making an investment of ₹3.6 lakh.
If the same pace of investment had continued for 5 years, the investment would have grown to ₹11.58 lakh by making an investment of ₹6 lakh.
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Likewise, if an investor had invested for a span of 10 years, the investment would have grown to ₹28.85 lakh while the total invested amount stands at ₹12 lakh.
And suppose someone had continued to invest ₹10,000 every month since inception, the total investment in the past 19 years and 8 months would have grown to ₹1.76 crore while the invested amount would have been only ₹23.6 lakh.
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Published: 28 May 2024, 07:21 PM IST