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See the power of reinvesting mutual fund returns with a calculator

See the power of reinvesting mutual fund returns with a calculator

When it comes to growing wealth, one of the most powerful financial concepts is compound interest. Compounding – which happens when the return on an investment earns additional returns – can exponentially increase the value of your assets over time.

However, visualizing the potential impact of the combination on your wealth can be difficult without the right tools. This is where a combination calculator can come in handy.

This free online tool helps you understand how much your investment can grow over time through compounding.

This article tells you more about combining, how to use a compound calculatorand how reinvesting mutual fund returns can optimize capitalization impact.

Understanding the combination

Compounding is the process of earning interest not only on your initial principal, but also on interest that accumulates over time. Unlike simple interest, where you only earn interest on your principal, compound interest can grow your money exponentially because your principal grows with each compound interval. Therefore, you can get higher profits with each cycle.

In the context of mutual funds, it’s not about the interest you earn, but the return on your investment. When the market value of your investments increases, you earn profit. When value goes down, your return goes down. If these profits are not withdrawn, the capital invested actually increases every time the value of the investment increases and you will continue to earn profits from your return. This can lead to exponential growth of wealth in the long term.

The power of reinvestment

When investing in mutual funds, you can choose between growth, IDCW payouts or IDCW reinvestment options. In the growth option, your return remains within the fund. In IDCW (Income Distribution with Withdrawal of Capital), a portion of your investments may be released to you as income from time to time.

The full potential of capitalization can be realized when you reinvest these returns. Reinvesting means that instead of withdrawing these earnings, you put them back into the scheme so that they can receive additional market exposure and potentially earn more returns. This can create a snowball effect where your returns can grow exponentially over a period of time as your invested basis (principal + reinvested return) continues to grow.

Using a compounding calculator helps you visualize the effect of compounding on your reinvestment. Most of these calculators assume that you will reinvest your earnings. Based on your investment value, horizon and interest rate (or expected rate of return), the calculator shows you how much your investments can grow over time. The longer the horizon, the more pronounced the effect of the combination.

This helps you understand the potential for exponential growth that reinvesting allows. This tool is particularly valuable for long-term investments, such as pension funds, where compounding over decades can lead to significant wealth accumulation.

Step-up SIP: Amplification of reinvestment power

In addition to reinvesting your returns, another way to increase your return potential is to increase your contributions consistently. This is where an intensive SIP comes into play. A systematic investment plan (SIP) allows you to invest a fixed amount in a mutual fund at regular intervals, usually monthly. The growth feature allows you to increase this contribution periodically, such as annually, to align with rising income or changing financial goals. A enhanced SIP calculator can help you see the effectiveness of this strategy.

For example, if you start with a Rs. 5,000 monthly investment and use an enhanced SIP to increase your contribution by 10% every year, an accelerated SIP calculator will help you see how these incremental recharges can add up over time.

Let’s compare two scenarios to illustrate the impact:

  1. Fixed SIP: Invest Rs. 5,000 per month for 20 years at an average rate of return of 8%. Over 20 years, your total investment would be Rs. 12,00,000 and your investment value would be around Rs. 29.45.100.

  2. Enhanced SIP: If you do a step-up SIP in the same scheme, after 20 years, you would have invested Rs. 34,36,632 and can earn Rs. 65,93,700.

The growth strategy, combined with reinvestment, can significantly boost the capitalization process, helping you achieve significantly higher returns over the long term. Note, however, that the calculator’s estimates are based on your inputs and there is no guarantee that returns will be along expected lines.

As we can see, the true potential of the combination is unleashed when you reinvest your profits and continuously grow your investment base. A compound interest calculator helps you visualize this exponential growth, showing how reinvesting interest, dividends and capital gains can significantly increase the value of your investments over time. With tools like these, you can plan your financial future more effectively, optimizing your wealth-building potential through the power of combination.

Mutual fund investments are subject to market risks, read all scheme documents carefully.

Disclaimer: This article is published in association with Bajaj Finserv and is not created by TNM Editorial.