These ELSS mutual funds gave over 20 percent annualised returns in the past five years. Check details

The power of compounding is so potent that it is often referred to as magic. From doyens of investing such as Benjamin Graham to contemporary market gurus, all and sundry laud the power of compounding.

The rationale behind is quite simple. An investment, when remains invested for too long, appreciates faster in the latter part of the tenure vis-à-vis the earlier part. This happens because in the latter years, the return accrued in the earlier years gets added to the principal amount.

Consequently, when an investment grows at a compounded rate of 20 percent for five years, the investment grows faster than what meets the eye.

Sample this, if an investor had invested ₹one lakh in a mutual fund scheme that has grown at a rate of 20 percent for the five consecutive years, the investment becomes ₹2.49 lakh, i.e., more than double.

Here, we demonstrate the power of compounding by examining the returns delivered by Equity Linked Savings Scheme (ELSS) in the past five years.

For the uninitiated, ELSS schemes refer to mutual funds which invests at least 80 percent in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.

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These mutual funds have a lock-in period of 3 years and are eligible for deduction under Sec 80C of the Income Tax Act up to ₹1,50,000.

(Source: AMFI, returns as on March 20, 2024)

As we can see in the table above, the highest returns of 29.98 percent were delivered by Quant ELSS Tax Saver Fund. This means if someone had invested ₹1 lakh in this scheme, it would have grown to ₹3.71 lakh. Likewise, ₹one lakh investment in Bank of India ELSS Tax Saver Fund would have grown to ₹2.96 lakh with an annualised return of 24.26 percent.

SBI Long Term Equity Fund has given an annualised return of 20.57 percent, thus letting an investment of ₹one lakh to grow to ₹2.55 lakh.