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Business News/ Mutual Funds / Magic of compounding: 1 lakh investment in this mutual fund at the time of launch would have swelled to 1.50 crore
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Magic of compounding: ₹1 lakh investment in this mutual fund at the time of launch would have swelled to ₹1.50 crore

Aditya Birla Sun Life Flexi Cap Fund delivered an exceptionally high performance of 21.73 per cent in the past 25 years and seven months; an investment of ₹1 lakh in the scheme at the time of its launch would have grown to ₹1.53 crore.

Past returns of a mutual fund scheme do not guarantee its future returns.Premium
Past returns of a mutual fund scheme do not guarantee its future returns.

What would you say if someone told you that an investment of 1 lakh in a mutual fund scheme at the time of its launch in August 1998 would have swelled to a whopping 1.53 crore in 25 years?

Sounds incredible but true!

The rationale behind this is far simpler than it sounds: compounding. This means that being invested for a long period of time accrues greater dividends than one can imagine.

Since mutual fund schemes, by default, reinvest the earnings made in the initial years, the returns in the later years are naturally higher than those earned in the initial years. Compounding is seen as a key reason for the massive wealth generation by the doyens of investing such as Warren Buffett.

Here, we deconstruct the benefits of compounding by taking an illustration of one randomly selected mutual fund scheme i.e., Aditya Birla Sun Life Flexi Cap Fund.

Years                         Returns (%)  1 lakh invested becomes (
1                                                         40.631.40 lakh
3                                              17.381.61 lakh
5                                                       16.202.11 lakh
10                                        16.764.71 lakh
SI                                            21.731.53 crore

(Source: AMFI)

As one can see from the table above, an investment of 1 lakh would have grown to 1.40 lakh in one year. If the same money were invested for a period of three years, it would have swelled to 1.61 lakh.

Likewise, if an investor had invested 1 lakh for a period of five years, the investment would have appreciated to a total of 2.11 lakh. Moving on, if an investor had invested 1 lakh for a decade, the investment would have grown to 4.71 lakh.

ALSO READ: How to become rich: Your 5000 monthly SIP can help you grow 5.22 crore. Mutual fund calculator explains

And since the mutual fund scheme delivered an exceptionally high performance of 21.73 per cent in the past 25 years and seven months, an investment of 1 lakh would have swelled to 1.53 crore.

More about the scheme

Aditya Birla Sun Life Flexi Cap Fund was launched on August 27, 1998, and is managed by Dhaval Joshi and Harish Krishnan. The fund's key constituent stocks are ICICI Bank, HDFC Bank, Infosys, Sun Pharma, HCL Technologies, RIL, Bharti Airtel, L&T and Apollo Hospitals.

The key constituent sectors are financials (27 per cent), technology (11.74 per cent), healthcare (11.3 per cent), consumer staples (8.7 per cent) and automobile (5.19 per cent).

Its total expense ratio is 1.68 per cent and its standard deviation is 12.77 per cent.

However, it is vital to note that the past returns of a scheme do not guarantee its future returns. In other words, just because a scheme has given high returns in the past does not mean that it will continue to grow at the same pace in the future.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.

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Published: 11 Apr 2024, 09:09 PM IST
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