Power of Compounding in SIPs: Even though investors have fretted this recent market correction and many have reportedly stopped their SIP or systematic investment plans, experts have claimed them to be a natural phenomenon in the investment cycle. In fact most of them have hailed this as an opportune time to revisit one’s portfolio and add to their investments during the course for still better returns.
How do mutual funds work to deliver compounding returns?
Typically, mutual funds pool investors’ corpus and their investment is put across asset classes, including stocks, bonds and other fixed-asset classes. And now these asset classes reap interest or return in various ways including dividend, interest among others, which is again ploughed back into mutual funds for substantial returns over time
So, now there is a compounding effect created as you besides earning income on your initial investment also make money from the reinvested corpus, growing your wealth exponentially with time.
Also, as there is always a positive side to any aspect, you can view times of correction in mutual fund investment as the times when you are able to get more units in a mutual fund investment. So instead of the bull run in your investment value, there can be seen a bull run with your units in such times.
For example, if you invest Rs 1000 assuming a return of 10 per cent annually, after one year, your investment grows to Rs 1100. The next year, the 10 per cent return is made on Rs 1100, multiplying your investment.
Compounding effect in SIP
SIP, which is primarily for long-term purposes and targeted at specific financial goals down the line, offers you enhanced compounding benefits together with the rupee cost averaging advantage that eventually helps you realise a higher return over time.
Nonetheless, with SIP and mutual fund investment one cannot disregard the fact that these return are market-linked and come with their own risk and reward. Also there are fees linked to fund management, expense ratio and other which may to an extent impact the compounding return benefit.
Hence to ensure your investments align with your future financial goals- it is imperative that you stick to your long-term financial goals as well as time and again review your portfolio for any changes required.
Top 10 mutual funds that have turned Rs 10,000 SIP up to Rs 2.15 crore as of April 19, 2025
Note investment into these funds via the SIP route was started on April 1, 2005 and now are worth up to more than Rs 2 crore.
|
Fund name |
SIP value in 20 years (As on April 19, 2025) |
|
Nippon India Pharma Fund |
Rs 2,14,81,715 |
|
ICICI Prudential Tech Fund |
Rs 1,85,99,892 |
|
ICICI Prudential Value Discovery Fund |
Rs 1,91,47,919 |
|
Canara Robeco Emerging Equities Fund |
Rs 1,89,60,011 |
|
Nippon India Growth Fund |
Rs 1,72,78,143 |
|
Sundaram Midcap Fund |
Rs 1,72,04,462 |
|
Kotak Smallcap Fund |
Rs 1,70,49,037 |
|
Franklin India Prima Fund |
Rs 1,64,16,398 |
|
HSBC Midcap Fund |
Rs 1,61,89,978 |
|
Nippon India Multicap Fund |
Rs 1,63,00,223 |
And if for this investment, an investor had taken on to annual SIP step up then their wealth would have increased further.
Disclaimer: This is not an investment advice to invest into these fund. Always look into your risk appetite together with your future financial goals to align your investments accordingly.