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| June 1, 2022

How Compounding Works in Mutual Funds

Mutual funds are a popular option for investment that ensures higher and long-term wealth at low investment amounts. The returns on mutual funds depend on several factors, including the type of fund you select for investment, the amount of money you invest and compounding. This powerful concept actually works as a multiplier of an investment portfolio and provides additional benefits in mutual funds. It is about reinvesting the interest amount back into the principal sum of the investment. The compounding process ensures that you get interest on your basic investment amount and keep on earning interest on the returns by simply reinvesting the interest earned on the principal amount. You have to start investing in mutual funds early as it can help the compounding interest grow higher over time. Here’s more on how compounding works in mutual funds.

Compounding in Mutual Funds

Mutual funds are perfect for investing and growing your hard-earned money. In mutual funds, investors get a dividend on the amount they invest – on a monthly, quarterly or annually basis. With the dividend earned on your funds, you get the option to reinvest the amount back into the mutual fund. When you decide to reinvest your dividends, you get better chances to earn more compound interest on your mutual funds. The compounding concept ensures that you get the interest on the initial amount you have invested and gain profits through the interest rates added to the funds. So, it actually means reinvesting the earnings attained from the initial amount rather than spending it.

Does Mutual Fund Give Compound Interest?

Mutual funds are wise investment options among investors due to high returns, diversification and the power of compound interest. It is the easiest way to make the most of compound interest. The more funds you invest for a longer time, the more compound interest you will get on mutual funds. With a higher mutual funds rate, you can amplify the benefits of compounding. Every investor can take advantage of the compounding concept and make the most of it.

How to Take More Advantages of Compounding in Mutual Funds?

Compounding is the best way to accumulate money through investments in mutual funds. However, there are a few things you need to do to make the most of the compounding process.

Start Early

Often, investors decide to start investing at a later stage in life when they have a higher amount of money for investment. However, it is a wrong approach and can impact the compounding in mutual funds. It is not mandatory to invest only in a significant amount of money to get a positive outcome. Ideally, you have to start investing in mutual funds as soon as you start earning. Research the market, look for a scheme that suits your financial goals and budget and start investing. Starting early in your life will help you build a strong base for your invested money to grow and keep on increasing it with the help of compounding interest. If you do not know about calculating the return on investment, you can use a mutual fund compound interest calculator online. It will help you understand the exact amount you need to invest for your future financial goals.

Be Regular with Investment

You have to be regular and disciplined about your investment if you wish to get more benefits from the compounding and grow your money. With regular investments in mutual funds, especially in the early years of the scheme, you can ensure consistency in your contribution for investment and get increased savings over time. Regardless of the fund amount, it is crucial to invest the amount on a regular basis and make it a habit.

Learn to Manage your Expenses

The concept of compounding works in the same way – be it an investment of Rs. 500 or 20000. However, investing a huge amount ensures higher interest significantly. One of the most effective ways to get better benefits of compounding on mutual fund interest rate is to increase the amount you invest in the mutual funds. Even if you invest in a limited budget, you can boost your savings by managing expenses efficiently. With compounding, you have the option to reinvest the interest amount that can help you to have more savings. So, spending money smartly can help you have more money to invest more and an opportunity to earn better returns.

Muthoot Finance, India’s most trusted financial services brand, provides a range of mutual fund schemes to meet diverse financial goals. Visit your nearest Muthoot Finance branch to get a better idea about liquid fund interest rates and other mutual funds schemes. Our experts can guide you to make the best decision based on your investment profile.

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