Magic of compounding: ₹1 lakh in this mutual fund would have grown to ₹7 lakh in 10 years

In one year, a return of 21 percent allows ₹one lakh of investment to grow to become ₹1.21 lakh. The return is impressive, but not awe-inspiring. But when the sum is kept invested for a long period, the investment grows at a faster rate. The rationale behind this faster growth is ‘compounding’.

The power of compounding is so profound and potent that it is euphemistically also known as ‘magic’. In fact, it is not magic in the literal sense but simple mathematics, something that we try to explain here.

Here, we deconstruct the ‘magic of compounding’ by taking an illustration of Nippon India Growth Fund. It is a mid-cap mutual fund. Let us first understand what mid cap funds are: 

Mid cap funds

These are mutual funds which invest at least 65 percent of their assets in mid cap stocks as per the Sebi’s categorisation of mutual fund schemes. And mid cap stocks are the securities of listed companies that are ranked anywhere between 101 to 250 when positioned according to their market capitalisation.

(Source: mf.nipponindiaim.com; AMFI)

As one can see in the table above, an investment of ₹one lakh has grown to ₹1.53 lakh in one year as it rises by 53.58 percent. In the past three years, the investment would have grown to ₹2.32 lakh as the scheme has a return of 32.37 percent.

In five years, the mid cap mutual fund grew by 25.72 per cent, thus letting an investment of ₹one lakh to grow to ₹3.14 lakh. Likewise, it would have grown to ₹7.08 lakh if the same investment would have remained invested during one decade.

About the scheme

The scheme was launched on Oct 8, 1995 and the fund managers are Rupesh Patel and Sanjay Doshi. Minimum investment in the scheme is ₹100 and in multiples of Re 1.

The top constituent stocks are PFC, Cholamandalam, Persistent Systems, Fortis Healthcare, Varun Beverages, Supreme Industries, NTPC, Prestige Estates Projects, AU Small Finance Bank and Angel One.