How compounding impacts your long term investment

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Being known to one’s investment goal helps an investor maximise return on one’s money. It helps choosing right fund during the portfolio allocation as well. However, it is always advisable to start investment as early as possible because it enables an investor to get compounding benefit. Irrespective of the investment option chosen by the investor, late investment leads to loss in compounding benefits as return on return becomes lower. That’s why longer is the investment higher is the compounding benefit and more chances for the investor to meet once investment goal.

Speaking on how the compounding impacts long-term investment Pankaj Mathpal, Founder & CEO at Optima Money Managers said, “Compounding has a big role in long-term investment as one gets benefit of return on return compounded in one’s corpus. That’s why, if the investment period is long, the investment amount gets lowered by huge margin. If an investor invests in mutual fund or any other investment instrument, small change in time leads to huge rise in the investment amount, and sometimes it leads to miss one’s investment goal as well because one can’t allocate that much of fund to create the corpus that the investor has set as its long-term goal.”

Sharing how compounding impacts an investor’s long-term investment Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, “In mutual fund if a per son wants to grow 2 crore in 20 years, its monthly SIP will be around 20,000 (SBI Mutual Fund Calculator says 20,017.056). However, if the investor is retiring after 15 years and want to create 2 crore fund in this period, one’s monthly SIP will be around 39,500 (SBI Mutual Fund calculator says exact 39,637.240), which is almost double of the monthly investment.”

According to SBI Mutual Fund SIP Calculator, if an investor wants to accumulate 2 crore in 20 years, then assuming 12 per cent return in equity mutual fund one will have to do 20,017.056 monthly SIP.

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Source: SBI Mutual Fund SIP Calculator

However, if the investor fails to do that in first five years and starts investing before 15 years of one’s retirement with same 2 crore investment goal, the SBI Mutual Fund SIP calculator says that the investor will have to make an SIP of 39,637.240 per month.

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Source: SBI Mutual Fund SIP Calculator

Jhaveri advised investors to know the importance of saving from the early phase of one’s career and avail maximum benefit of compounding benefit.

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