Understanding Compounding
In context of mutual funds, this means that the interest or dividends you earn are added to your principal, and this new total continues to earn returns.
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Starting Early
Starting an SIP at the age of 25 instead of 35 can potentially yield significantly higher returns due to the longer compounding period.
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Consistency is Key
The systematic nature of SIPs – investing a fixed amount regularly – takes advantage of rupee cost averaging, which mitigates the impact of market volatility.
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Tax Efficiency
Equity mutual funds held for more than one year qualify for long-term capital gains tax at 10%, with gains up to Rs 1 lakh exempt from tax. This tax efficiency enhances the effective returns, thus boosting the compounding effect.
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Power of Regular Investments
An SIP of Rs 5,000 per month over 20 years at an average annual return of 12% can grow to approximately Rs 50 lakhs.
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Inflation-Adjusted Returns
Compounding helps combat inflation. Long-term investments in equity mutual funds, aided by compounding, typically outperform inflation.
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Discipline and Automation
SIP automation ensures that investments are made regularly, capitalizing on the power of compounding without requiring constant intervention.
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Patience Pays Off
The initial years might not show dramatic growth, but as the investment matures, the returns start generating their own returns, creating a snowball effect.
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Disclaimer
The above article is meant for informational purposes only, and should not be considered as any investment advice. Times Now Digital suggests its readers/audience to consult their financial advisors before making any money related decisions.
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