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Understanding The Power Of Compounding, Investing In Mutual Funds

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Seeking for financial support at your old age could be difficult, while having a corpus of a million can give you a financial freedom post retirement. A study shows that 90% of earning individuals in the world doesn't even apply the rule of compounding at the right age. Albert Einstein one said, compounding is the 8th World of this world and practically its even true. Now lets understand what compounding is and how this helps you to build a massive maturity corpus while investing just peanuts. 

What Is Compounding?

Compounding is like a repeated interest which you gets on your invested value. Now let's understand compounding with an example. Jamie is a person who started investing in stocks, mutual funds, bank FD or any other financial instrument where he earns an interest of 12% per annum. Now let's consider the monthly investment amount is 100$ per month and it's starting from January. Now in the entire month of January Jamie has got 1% of interest on the invested amount of 100$ which then turns into 101$ now in the forthcoming month of February Jamie will have 101$ in his investment wallet. Now that 101$ will earn an interest of 1% which will be 1.01$ instead of just 1$. The same rule of getting interest on the accumulated interest will go on and hence the power of compounding will play its role. 

Compounding is a good mate of time which means the longer you keep investing your money, the more compounding will favour to grow your funds. 

Tips Take Advantage Of Compounding

One can take advantage of compounding by making various investments. The most common one these days are Mutual Funds while in old age it was Fixed Deposits in bank which used to serve a fixed 7-8% interest per year. But as you are investing in Mutual Funds the interest rate is not fixed. It depends on the stocks which your fund manager is putting your money in and stock market of that country. If the economy of the country is growing, the stock market will rise and hence you will earn more interest on your invested funds.  

Mutual Funds And Its Types

There are various fund manager available in India and other countries like Nippon, SBI, Quant, HDFC, Motilal Oswal (We do not recommend anyone, this is just for educational purpose, please consult your financial advisor before investing, stock market is subject to market risks, please read scheme related details carefully). You can choose any of the fund manager as per their past records of return they created for their clients. Now suppose you picked up Nippon to invest in, then comes the major part which type of Mutual Fund you want to invest in. There are primarily three types of Mutual Funds which are listed below:

- Small Cap Mutual Fund

- Mid Cap Mutual Fund

- Large Cap Mutual Fund

Small Cap Mutual Fund relates to investing in companies that has small financial graphs and are at growing stage. The risk probability in small cap is far more than the mid cap and the large cap. 

While the Mid Cap Mutual Fund relates to investing in companies that are medium in size and working capital. This Mid Cap gives better results than Large cap but has risk more than Large Cap and lesser than the Small Cap. 

Large Cap Mutual Funds are the most safest mode of investment as you are investing in the companies that are biggest giants of the country and comprises a major part in the stock exchange for the nation. Hence the risk over your investment is minimal in comparison to above explained small cap and mid cap fund.

To understand the power of compounding, if you are investing a capital of 5000 INR per month in a mutual fund that gives you 18% return per year, the maturity corpus after 10 years would be 16,81,288 INR while it would be 1,17,17,436 INR if you keeps it moving for next 10 years as well. Hence the power of compounding helps you to achieve bigger financial goal with a small monthly/weekly/daily investment.

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