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POSTED BY ON April 1, 2014 6:35 pm COMMENTS (4)
Most of the financial advisors talk about the power of compounding. I can understand that in PPF/ EPF accounts the compounding happens. But can some one explain me how the compounding happens in case of SIP in mutual funds ??? Are they talking about the debt mutual funds where some constant interest is there ??? because in normal mutual funds the value only increases,,, if the NAV increases you get the benefit or else you nothing … and over the period the value increases,, i agree with that. but how its compounding ?????????
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Dear Bijay,
As you may know, compounding could be calculated if we know two parameters duration and rate of interest.
Unlike traditional FD where rate of interest is know we could not predict exact ROI with mutual fund’s. So compounding with mutual fund could be estimated with past performance or future estimation of average ROI.
Of course you include the know parameter, the principal you invest.
Dear Bijay, the original NAV of Reliance Growth fund was 10 Rs. in 1995. Now it’s 500+ Rs. Can you see the compounding for original 10 Rs. invested?
Thanks
Ashal
Dear Bijay,
Compounding comes into picture only when the mutual fund is performing and NAV is increasing. If it is not performing well, there is no power of compounding…. simple
Regards,
Hemanth.