Staying invested for a long period of time in a stock or a mutual fund tends to deliver disproportionately higher return provided the choice of stock or fund is correct. This happens because of the phenomenon known as compounding. It is so potent that some experts refer to it as ‘magic’.
The rationale behind compounding works like this: return on investment in the first few years gets added to the initial investment, which allows the principal to deliver even higher returns in later years. Consequently, the initial investment grows significantly. To illustrate this point, we handpick one mutual fund scheme Tata Equity P/E Fund which has delivered 16 percent return on its SIP.
Here, we explain how much the investment would have grown if someone were regular in investing ₹10,000 a month via systematic investment plan (SIP).
If someone were investing ₹10,000 a month for one year, the investment would have declined to ₹1.14 lakh by investing ₹1.20 lakh.
If someone were investing the same amount for three years, the investment would have grown to ₹4.65 lakh by investing only ₹3.60 lakh, delivering a return of 17.47 percent during this period.
(Source: tatamutualfund.com)
Now imagine if someone were regular in investing for five years, the consistent investment of ₹10,000 would have grown to ₹9.66 lakh by investing a total of ₹6 lakh, reflecting a return of 19.15 percent.
If someone were investing consistently since the inception of the scheme in June 2004, it would have grown to ₹1.71 crore by investing a total of ₹25 lakh, giving an annualised return of 16 percent, reveals fund house’s official website. It was assumed that the SIP was invested on the first day of every month.
More about the scheme
This growth-oriented value fund was launched on June 29, 2004. The scheme’s key constituent stocks are HDFC Bank, BPCL, Kotak Mahindra Bank, ICICI Bank, Radico Khaitan, Coal India, Motilal Oswal, Muthoot Finance and Shriram Finance.
This scheme is managed by two fund managers: Sonam Udasi and Amey Sathe.
Sector-wise, this scheme has invested across sectors financial services (38.24%), oil, gas and consumable fuels (10.83%), IT (7.77%), FMCG (7.02%) and automobile and auto components (5.63%).
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