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Mutual Funds - The Magic Of Compounding
Another
way that your money grows in a mutual fund is through compound growth that
results when you reinvest the income. If a fund pays you a dividend and you use
the dividend to buy more shares, you'll earn even more the next time around;
you'll receive dividends on your original investment as well as on the
additional shares. Compounding can work wonders on the value of your investment,
especially over long periods of time.
Take an initial investment of Rs.10,000 earning an average of 9% each year for
10 years and withdraw your earnings each year instead of reinvesting them.
You'll have Rs.19,000 at the end of 10 years (Rs.10,000 initial investment + 10
payments of Rs.900). Take the same investment and leave the annual earnings in
the account to compound, you'll have Rs.23,674, or nearly 25% more.
Compound growth also works dramatically if you invest on a regular basis. If you
were to invest Rs.200 each month for 10 years (Rs.24,000 in all), earn an
average of 9% per year and reinvest your earnings, you'd wind up with Rs.38,703.
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