If your money is not working hard 24/7 for you then you will always end up working hard for your money till your last breath.
Compounding does that for you, it works for you even when
you are not working.
What is compounding?
Compounding is magical and yet simple & effective all at
the same time.
Compounding by definition means the increase in value of an
investment because of the gains earned not only on the principal amount but
also the interest amount.
Simple interest refers to the interest gained on an
investment whereas compound interest refers to the gains on both the principal
as well as the interest.
In simple language, with compounding you can gain not only
on the principal amount but also the interest amount.
Additional reading: Click Here to read about how Inflation is destroying your hard earned money.
Benefits of
compounding
In compounding, the interest earned is reinvested.
Therefore both your principal amount as well as your
interest amount is both always at work.
In a year or two it may not amount to much but the real
benefit of this can be seen only after a few years.
Therefore this is a very powerful tool for long term goals since
compounding in the long run has the potential to beat inflation.
SIP’s and Compounding
For compounding to be really effective, the two most
important points to consider are time & reinvestment of earnings.
As mentioned previously, compounding needs time to work its
magic and is not a short term solution.
Imagine a system where not only are you able to generate
returns on your principal amount but also your earnings.
SIP in a mutual fund is built in a manner very conducive to
this, the only thing you need to do is absolutely nothing.
The amount no matter how small will be debited on a monthly
basis over a long period of time, irrespective of market highs or lows and
thereby your investments get averaged out and volatility takes a backseat.
With the growth plan, your earnings stay invested and can
fetch returns too and therefore using this process can build wealth in the
long run.
Stopping sip’s in between or withdrawing any amount is
detrimental to the overall process though.
No matter how small the amount, just begin because a
difference of even 5 years can make a huge difference in the end.
This is because in those 5 years, the principal amount as
well as the returns on the principal amount generated gains.
Features of
Compounding in SIP mutual fund
Discipline
Stay disciplined no matter what.
Do not let the market highs & lows deter you in any
manner whatsoever.
Do not fall into the trap of stopping your sips during
market lows and letting fear win, this is counter productive.
Make sure you do not miss any sip installment.
Start early
Start as early as possible irrespective of how small your
amount may be.
It is better to start early with a small amount than to
start later with a higher amount.
This is because when you start off with a smaller amount,
you are giving it time to grow.
This means not only your principal amount but also your
earnings are working for you and fetching returns.
Time is of essence here, you can start off later with a
higher amount but you will never be able to make up for lost time and the more
time you spend in the market, the better it is for your portfolio.
Keep growing
As you progress in your career, so should your allocation to
sips.
Do not stick still with the amount you began with.
Remember, inflation is going to keep on growing so you need
to increase your allocation.
Control your expenses and let your needs take precedence
over your wants.
Learn patience
Patience as a virtue cannot be taught, it can only be
learnt.
Sadly even today many investors try chasing quick returns.
They end up making losses and then in order to recuperate
those losses, make more losses.
It’s a vicious circle.
There is no short cut to building wealth via investing in
mutual funds, you have to take the long route.
The easiest way to go about this is to link your investments
to long term goals so you are not tempted to move out quickly and stay
motivated by your long term goals.
Avoid
outside noise
It is in human nature to be influenced by others.
Often investors are lured and swayed by those who claim to
have tips and knowledge of best funds.
Media outlets often resort to panic driven headlines
motivated by driving in more clicks.
Then of course there’s our friends, family and relatives
with their mandatory but unsolicited advice on what we are doing wrong.
Yet with everything said & done, can anyone of those
mentioned above take accountability for their advice?
Think of it in this way, would you get a medical operation
done by someone who’s qualified and a professional or someone you just happen
to know.
Often when one takes any advice from someone with no
accountability, not only is future returns at risk but whatever has been
accumulated so far also becomes prone to downfall.
Compounding is the most effective & yet the simplest
point of investing in mutual funds and turning your money into wealth.
Where most people unfortunately falter is at not having
enough patience & being unable to stay the course.
Let your money work for you rather than you working hard for
it.
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