When you make an investment in a mutual fund scheme, the return grows at a rate faster in the later years than in the earlier years. This happens primarily because of compounding.
The compounding is so potent a tool that it is euphemistically known as ‘magic’ by some.
From Ben Graham to Warren Buffett, all the legends of investing have spoken at great length about compounding.
Here we demonstrate the power of compounding by examining the return of one mutual fund scheme - Edelweiss Aggressive Hybrid Mutual Fund.
Sample this: If you had invested ₹1 lakh in Edelweiss Aggressive Hybrid Fund, the investment would have grown 35.56 per cent in one year. This means an investment of ₹1 lakh would have become ₹1.35 lakh.
Likewise, an investment of ₹1 lakh would have grown to ₹1.71 lakh in three years. If someone had invested ₹1 lakh five years ago, it would have swelled to ₹2.48 lakh.
| Tenure | ₹1 lakh becomes (Rs) |
| 1 | 1.35 lakh |
| 3 | 1.71 lakh |
| 5 | 2.48 lakh |
| 10 | 3.60 lakh |
| Inception | 6.18 lakh |
(Source: Edelweissmf.com)
In the 10 years’ time, the investment would have delivered an annualised return of 13.92 per cent. Therefore, an investment of ₹1 lakh would have grown to ₹3.68 lakh during this time, according to the AMFI data as of August 21, 2024.
If your ₹1 lakh investment had remained intact in the scheme since its launch (i.e., August 12, 2009), it would have grown to ₹6.18 lakh as of July 31, thus delivering a return of 12.84 per cent.
This means the investment has grown by six times in a time span of 15 years.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.
