Stick with your investments to benefit from high returns in the long term

The power of com pounding is one of those effects in any one's portfolio that financial planners swear by. That's because, to realize the true potential of a long-term investment, you need to have compounding on your side. A person should always keep in mind while investing that compounding amplifies the growth of the working money. Just like investing maximizes your earning potential, compounding maximizes the earning potential of your investments. But remember, because time and reinvesting make compounding work, you must keep your hands off the principal and the interest earned on that.

They often say that it's not the timing of investment but the time in investments that creates great wealth. It is surprising to know that an eye-popping 99% of wealth created by Warren Buffett, the celebrated investor and one of world's richest persons, was earned after his 50th birthday. Buffett made $62.7 billion of his $63.3 billion net worth after his 50th birthday. Such robust wealth in his 50s was created due to the magic of compounding in his investments. Buffet had started investing at a very early age and reaped the benefits of compounding over years.

Using the MF route

A systematic investment plan (SIP) in a mutual fund is an effective means to beat market volatility and benefit from the enormous power of compounding over time. An SIP allows you to invest in any mutual fund by making smaller periodic investments instead of a lump sum, one-time investment. Since this is small money flowing out at regular intervals, it doesn't affect your other financial commitments significantly. Rupee cost averaging is another benefit investors can reap from a disciplined SIP . Investing a fixed amount in a fund at regular intervals over time gets you more units when the price is lower, and the average cost per unit comes down.

The other advantage of investing through the mutual fund route is the higher expected rate of return compared to most other investments. To understand the role of returns, let us assume early investments of Rs 60,000 in each -fixed deposits and mutual funds (market linked products). The table Choose The Right Avenue illustrates the returns from each. It shows not only that higher returns help create a much larger corpus, but also conveys that the more you stay invested, the bigger the corpus will be.

Understand the risks involved

However, there is a word of caution: Several investors opt for aggressive investment products that may give higher returns, but they also come with higher risk. "They feel an aggressive portfolio will lead to wealth creation in shorter duration, which is not always true. It is also recommended to understand your risk appetite by undergoing a risk profile test and then take an investment decision.

Despite the advantages, investors, however, do not always reap the benefits of compounding. There are two main reasons for the same, Moving in and out of investments frequently cancels much of the benefits of compounding. Frequent churning would be akin to `taking two steps forward and one step back'. The other is choosing only low-return investments and restricting yourself purely to them for your long-term savings. This will rob you of the famed `multiplier effect'.