Last Updated:June 25, 2025, 18:59 IST
Due to the power of compounding, small amounts invested consistently over the years can grow into a sizable corpus in the long term.
The compound interest could be highly rewarding when you remain invested for a longer duration. (Photo Source: Freepik)
A well-planned financial strategy can help to build wealth, even with the investment of small amounts. Consistency and financial discipline can help anyone build a sizable corpus fund in the long term. Remaining invested over a long-term horizon can help your money grow substantially. This is the power of compounding.
For instance, mutual fund SIPs (systematic investment plans) allow you to invest a small amount every month, which can grow to a huge amount over the years, despite the market conditions.
Compounding means earning returns not just on your original investment but also on the returns already earned. In a Systematic Investment Plan (SIP), where you invest a fixed amount regularly, compounding helps your money grow faster over time.
The difference may seem small in the first year, but over the longer tenure, it can grow substantially. Due to the power of compounding, small amounts invested consistently over the years can grow into a sizable corpus in the long term. The compound interest could be highly rewarding when you remain invested for a longer duration.
That’s why starting early and staying invested helps build a huge corpus fund.
How Compound Interest
Compound interest is calculated using the formula:
A = P(1 + r/n)^(nt)
Here:
– A is the final amount
– P is the initial investment
– r is the annual interest rate
– n is how often interest is added (monthly, quarterly, yearly)
– t is the number of years
Compounding in Mutual Funds
Mutual funds grow in value over time. If you reinvest any dividends, it boosts your returns further. The earliest SIP instalments usually grow the most as they have the longest time to compound.
Tips to Maximise Compounding in SIPs:
– Start early: More time means more growth.
– Reinvest returns: Don’t withdraw dividends or capital gains. Let them grow.
– Pick the right funds: Choose mutual funds with strong past performance.
Long-term Investment For Higher Returns
Compounding works best when you’re patient and consistent. Long-term investors benefit the most. Even a one-year difference in the investment tenure can reduce your total returns significantly.
Watch for Inflation and Costs
Compounding has some downsides. Inflation can eat into your returns. Always aim for investments that beat inflation.
High fees and taxes can reduce your final returns. Compare expense ratios and pick tax-efficient funds. Compounding in SIPs is a powerful tool to build wealth. But it needs time, discipline and smart planning. Start early, invest regularly and let your money grow.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
- First Published:
#Power #Compounding #Helps #Wealth #Accumulation #Monthly #SIPs #Business #News
