Are you looking to exponentially grow your mutual fund returns as an investor? If yes, you must understand the concept of compounding and its power. This article explains the term power of compounding and offers tips to help you grow your mutual fund returns over time using a power of compounding calculator.
What is power of compounding and how does it work?
The power of compounding is not an alien concept to a seasoned investor; however, it is one of the first learnings of several first-time investors learning to invest. The term signifies the importance of compounding interest and how it helps an investor create more wealth out of their investments. Compounding here refers to re-investing the interest earned on an initial investment, thereby allowing the investor’s money to grow exponentially over time.
Tips to grow your wealth using the power of compounding:
Simply understanding the power of compounding isn’t enough, one must put this knowledge to practice. Here are six tips that can help investors do just that:
• Starting early can help the investor have an edge: Early starters have a clear advantage over others when it comes to leveraging the power of compounding. Therefore, if you have the capital and the inclination to invest, you must start early.
• Investors must invest regularly to leverage the power of compounding: Being consistent is key to leveraging the power of compounding. You must decide on a frequency (monthly, bi-monthly, etc.) and stick to it for the long term.
• Re-assessing your portfolio and choosing the right investments is key: You can benefit a great deal by re-assessing your investments time and again and making changes to your portfolio mix. You must keep checking if your investments are aligning well with your larger financial goals.
• Re-investing interest and dividends to benefit from the power of compounding: If you wish to benefit from the power of compounding in the long run, you must re-invest the interest and dividends that you earn from your investments.
• Staying invested for the long-term bears more fruit: You must stay invested for the longer term. The power of compounding is a strategy that offers benefits in the long run. You must, therefore, resist the temptation of withdrawing your investments early.
• Finally, you must keep increasing the investment amount: As the final step, you must gradually increase your investment amount to make the most of the power of compounding. A higher investment amount translates to higher returns in the long run.
A freeonline tool that can help you witness the power of compounding is the compound interest calculator, also called the power of compounding calculator. A compound interest calculator has a few fields that you must fill to calculate your returns –your investment amount, investment horizon, and your expected annual rate of return. A power of compounding calculator helps you as an investor know the exact value of your mutual fund returns at the end of a specified investment horizon. This can help you plan for your investments in advance and make changes to your investment tenure if required.
