What a wonderful thing it would be if our money toiled as hard as we did to earn it! Fortunately, we can accomplish this using the enchanted concept of compounding.
Before we dive deep into the magic of compounding, we must know what compounding and SIP precisely are.
What is Compounding?
This simple yet powerful notion of investment acts as a multiplier in your financial portfolio. Compound interest, often known as compounding, alludes to the concept that you earn interest on the initial principal amount you have invested and the interest that constantly keeps adding to it.
Essentially, compounding is a long-term investing tactic that includes reinvestment of time and earnings.
What is SIP?
SIP is a systematic investment plan wherein investors can choose to invest in mutual funds through a systematic and disciplined investing route by investing a fixed amount of money every week or month on a specified date.
Using a combination of a variety of assets, including stocks and bonds, mutual funds offer the benefit of diversification together with the perks of compounding, which results in an exponential growth of your money.
Many times, people erroneously use the terms “Mutual Funds” and “SIP” interchangeably. Truthfully, Mutual funds are among the most inviting acquisitions for stock market investors aiming for portfolio diversification, and SIP is just one way to invest in Mutual Funds, while lump sum investment is the other.
Unfolding the Magic of Compounding
Let’s examine the magic of compounding using an example:
| Year | Basic Principal Amount | Interest (12% p.a) |
| 1 | 10,000 | 1,200 |
| 2 | 10,000 | 1,200 |
| 3 | 10,000 | 1,200 |
| 4 | 10,000 | 1,200 |
| 5 | 10,000 | 1,200 |
| 6 | 10,000 | 1,200 |
| 7 | 10,000 | 1,200 |
| 8 | 10,000 | 1,200 |
| 9 | 10,000 | 1,200 |
| 10 | 10,000 | 1,200 |
Case 1: Investor keeps his accumulated interest aside
Results:
Amount Invested: 10,000
Total Interest Earned: 12,000
Total Value of Investment in 10 Years: 22,000
| Year | Basic Principal Amount | Interest (12% p.a) |
| 1 | 10,000 | 1,200 |
| 2 | 10,000 | 1,344 |
| 3 | 10,000 | 1,505 |
| 4 | 10,000 | 1,686 |
| 5 | 10,000 | 1,888 |
| 6 | 10,000 | 2,115 |
| 7 | 10,000 | 2,369 |
| 8 | 10,000 | 2,653 |
| 9 | 10,000 | 2,971 |
| 10 | 10,000 | 3,328 |
Case 2: Investor reinvests his money and let compounding do the wonders.
Results:
Amount Invested: 10,000
Total Interest Earned: 21,059
Total Value of Investment in 10 Years: 31,059.
Well, it might be confusing for investors to keep so many factors in mind and reckon how much, at what rate, and for how long to invest, and this is where the SIP return calculatoror Mutual Fund return calculator help.
Wondering what a SIP return calculator or Mutual Fund return calculator is? We got you!
The SIP Return Calculator is an effective instrument that enables investors to get a picture of the returns on money invested in SIP. This tool is designed to● Assist you in the determination of the amount you want to invest● Give you an estimated value of the return that you will reap after the investment term.
Also, the Mutual Fund Return Calculator additionally helps investors in the calculation of the returns while making lump sum investments.
How to unfold the Magic of Compounding properly?
If done adequately, compounding enables you to appreciate the value of your investments. Let us understand how.1. Begin Investing Early:
The key to success is to get started investing as soon as you can. It’s a good idea to begin your financial journey the day you get your first paycheck. If you haven’t begun investing theretofore, do so right away. If you put off saving, it might become challenging to get where you’re going.2. Regularity: Regular investing will make your portfolio more robust. The greatest way to build wealth is via consistent and targeted contributions. The only way to be disciplined and regular here is to set or establish priorities.
For example, if you earn ₹80,000 a month, set aside at least ₹500 (not a big deal, or is it?) for investments in SIP and let the magic of compounding begin.3. Have Patience: This is the aspect of wealth accumulation that matters the most. It is recommended not to make any rash or hasty investment decisions. It should be noted that the magic of compounding can only be felt and understood when investments are allowed to develop at their own speed. Even though it could seem like your assets are not growing, soon, with time, you will be surprised by what compounding can do for your investment portfolio after years of strategic and deliberate investing.
To Conclude:
Now that you are cognizant of the magic of compounding in SIP, start investing today. Irrespective of how modest a sum is, if you wait for compounding to kick in, your little money will eventually increase into a sizable sum.