Compounding is too strong a weapon to be overlooked in the armoury of every investor. As the investment appreciates, the return gets added to it, thus enabling the base to grow. It is at this inflated base that the investment stands to appreciate in the successive years.
Here, we explain the virtues of compounding by taking the illustration of one mid-cap mutual fund i.e., Edelweiss Mid Cap Fund which has grown at an extended internal rate of return (XIRR) of 20.1 percent in the past 16 years since it was launched.
To put things into perspective, if someone were consistently investing ₹10,000 every month in this scheme, the investment would have grown substantially. The total investment made and the returns generated are given in the table below.
As one can see in the table below, if someone had made an SIP of ₹10,000 for one year, it would have grown to ₹1.51 lakh by investing a total of ₹1.20 lakh, which means a return of 52.66 percent.
Likewise, if the SIPs continued for three-year period, it would have swelled to around ₹5.33 lakh by investing ₹3.6 lakh.
In a five-year period, the investment of ₹6 lakh would have grown to ₹12.26 lakh, which is more than double the investment made.
Tenor | Total wealth (Rs) | Investment (Rs) | Returns (XIRR%) |
1 year | 1,51,568 | 1.2 lakh | 52.66 |
3 years | 5,33,584 | 3.6 lakh | 27.4 |
5 years | 12,26,847 | 6 lakh | 29.13 |
since inception | 1,20,91,606 | 19.2 lakh | 20.1 |
(Source: edelweissmf.com, performance as on Dec 29, 2023)
And finally, if someone were consistent enough to invest ₹10,000 a month for the sixteen continuous years i.e., since Dec 2007 when the scheme was launched, then the total investment would have swelled to ₹1.20 crore by making total investment of only ₹19.2 lakh.
Edelweiss Mid Cap Fund was launched on Dec 26, 2007. The scheme’s assets under management (AUM) are ₹4,915 crore and expense ratio is 1.82 percent. The minimum investment is ₹100 and in multiples of Re 1 thereafter, as per the information shared on edelweissmf.com.
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