- Gain from the power of compounding Albert Einstein once called compounding the greatest mathematical discovery ever. Indeed! Compounding has a multiplier effect on wealth creation. However, to gain from the power of compounding, you need to stay invested for a long period.
- Averages out risk Every investment carries an element of risk. This risk is more for market-linked instruments such as equities and stocks. This risk can be mitigated by staying invested for a long haul. This is because when you do so, the risk is spread over a period of time.
- Help build a sizeable corpus Goals such as higher education of children and retirement, among others need a large reservoir of funds. This is possible only if you remain invested for a long period. When you do so, you give more time to your money to grow and gain from compounding.
- Helps you be stress-free When you are committed for the long term, you don’t have to keep a tab on every market movement. Tapping every movement of the market is a tall order and any dip or fluctuation can be a cause of stress.
When you invest in any financial instrument, it generates interest. Compounding results in the interest generating a further interest which increases your wealth manifold. For instance, even a modest SIP of Rs. 5,000 in an equity mutual fund offering annualised return of 12% for a period of 5 years can help you amass a corpus of over Rs. 11 lakhs. While the amount invested is Rs. 6 lakh, wealth gain is over Rs. 5 lakhs. This is possible because of compounding.
On the other hand, staying invested for a shorter period, especially in case of instruments whose performance depends on market movements, enhances the risk element by several notches. Hence, it’s important to remain invested for a long period to cut the risk element of your investment.
At the same time, it ensures that you can start with a small amount since you have the luxury of time. For example, if you want to want to accumulate a corpus of say Rs. 50 lakhs in 25 years, you can opt for a SIP of Rs. 3000 in an equity mutual fund offering annualised returns of 12%. However, to build the same corpus in 15 years with the same returns, you need a SIP of Rs. 10,000.
However, staying invested for a long period means you need not track every movement of the market which keeps stress and anxiety at bay.
Before opting for any investment, it’s essential to gauge your risk appetite and time frame for which you wish to remain invested to make an informed choice.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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