Do we get compounding benefits in case of lumpsum investment in mutual funds?

Do we get compounding benefits in case of lumpsum investment in mutual funds?

As per many YouTubers, we get compounding benefits only in the case of SIP where we are investing some amount say for 10 years. Is compounding benefits only for SIP? What if I have invested 10 lakhs lumpsum amount in a mutual fund?

Will I be getting less compounding benefit in case of lumpsum investment against SIP investment?

Any type of investment whether sip or lump sum has the same benefit of compounding. The only advantage with a sip is that you are investing small amounts over time. Another advantage in case of lumpsum investing will be ur compounding (if any) will be higher than the sip. What is needed is the duration or the time invested. Longer the time, longer will be the benefits.

The compounding effect can easily be explained with the help of fd

Lumpsum investment is like you open a fd and principal and interest u get on maturity. The interest keeps accumulating on a quarterly basis until maturity

A sip investment is like a recurring deposit. A small fixed amount is invested every month and quarterly interest gets compounded based on the amount invested

The same rule applies in case of funds where corporate actions such as dividends gets accumulated over time the value increases

To answer your query since u invested lumpsum in a mf, your compounding will be higher than a person who is doing sip as the capital they are investing is small whilst yours will be higher.

The advantage of a sip is you get the rupee cost averaging benefits as the investment is small and spread over time


Well explained. Thanks :slight_smile:

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There is no benefit of compounding in equity MF. When price moves up or down and the value changes accordingly, there is no compounding technically, because there could be capital loss too, irrespective of the accumulated units by lump sum or SIP.

Compounding exists with steady growth products, debt products, where you get positive return YoY. PPF is the best example I can give.

Over the course of time, when one wants to book profits and the investment has grown by that time, we can check how much it has grown by calculating CAGR, IRR or XIRR.

@Jason_Castelino Your professional definition is needed.


When fundamentals of a company remain same, short term price movements are mainly because of technical reasons. Over a long period of time, fundamentals of the company work.

MF are for long term. I don’t think one should try to time the entry and exit on technical analysis.
So obviously over a period of time, there will be compounding effect. It is implicit.

Lol. Not very sure what exactly are you looking for.

In simple words, compounding exits in equity, debt, real estate or any other class of asset for the matter whether it’s direct investing or by means of mutual funds.

They are a MF institution, so not particularly helpful with presenting the other side, and I read it.

Who said anything about technicals here, and MF is not a company, we are not talking about stocks here, that is a different ball game, as you know.

I am not talking about entries and exits here, that is moving from one asset class to another. Over a period of time is arbitrary, it is subjective. In the long run, markets go up is sales pitch, at the time of redemption is important for an investor, this is unfortunately not discussed.

When the price of the product that I have invested in moves erratically, and if it is down at the time of my need of redemption, it could be low compared to a non volatile product like PPF which does not go down is my simple point, and as such compounding in equity in its traditional meaning does not work the way it works with debt but is advertised so.

Very wrong. Just buy and hold and it will compound. 10L becomes 20L. 20L becomes 40L and so one. Returns over 1 year are usually shown in CAGR.

Youtube is filled with garbage content ( along with good stuff ofc) and even more garbage scammy adverts. Shameless movie ‘stars’ peddling rummy crap.

Yes true, if you get unlucky then markets can be in a crash and that is a bad time to sell. But markets do go up and i made decent money over more than 15 years in spite of making many mistakes. But if people succumb to fear and greed, returns will reduce accordingly.

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I know that, I started as a MF investor, but if I am investing for 10 years, and at the beginning of 10th year if markets start to fall, whatever profit I had till then could very well be lost was my point, hence asset rebalancing is needed for tenure investments.

@neha1101 @Jason_Castelino @SpacemanSpiff

All of this was for OP, just presented my views, nothing is for you, as we all have our own thesis, plan and experience, and we will continue with them, so I think I should stop this.

You are not newbies :grinning:

Happened in covid fall. A lot of the returns were ( temporarily) wiped out and even decade long returns were shit. I would still say that returns compound but yes with disclaimer that it is volatile, uncertain and you can very well have even lost decades. So you need some sort of retirement planning for it. SIP will have same issue once capital becomes heavily weighted vs SIP amounts.

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This is another point that is not discussed. After a while the invested amount becomes big and is subjected to the movements of the market and everything goes for a toss.

A person may have invested through SIPs but the total invested will have the same NAV, which if is less than the average price will result in net loss.

When you said technically I thought you are referring to technical analysis wala technical.
If you meant it otherwise then I already told you. There is compounding for sure.

Not at all. Equity mutual funds is as good as a stock.

In a long run your entry and exit hardly matters. Even if you lose 10 percent on top it’s not a big deal.

Again. Not relevant. Over a long run fundamentals of that asset remains intact there is no way it will trade below your buy price.

Then there is no compounding in any asset.
Let’s say you put your money in FD. After 10 years, you decide you redeem it. And then from your SB account somebody take it away by fraud. You lost that money.
What am saying here is, fundamentally there was nothing wrong with your FD. It compounded well. But because of your other factors which you lost your money. That’s totally not related. It’s an external risk.

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Compounding simply means ‘Interest on Interest’. So , let say you have Rs.100 now it became 130 in 1 years(30% return). Now if next year Asset value increased 30% now you have Rs 169 so extra Rs 9 came from your interest on interest from 1st year and so on. This is compounding. This in theory works really well for any asset if its keep on appreciating( Debt funds, Inflationary asset like Gold,Real estate etc.). This effect can be seen with inflation as well. So , prices seems large as we increase time. Like 30 years back milk was Rs10 , 15 years back milk was 30 , now its 70 etc.

Equity is non linear instrument. Let say you bought at Nifty 18k. It went up then down for few years you got no return but there are Expense ratio approx 1-2% so your loosing that . Suddenly , market crashes and you don’t have any money to put in. Remember , Market crashes when there is liquidity crisis of some sought. So , you need liquidity at that point to go max in ( in systematic way). Thats why big hedge fund manager sit on cash to put in at the time of crisis and then ride the trend. Index and Sectors fund are better rather than investing in single company.

In nutshell, For non inlinear instument it make sense to go in SIP mode rather in one go.

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For those who are investing for a particular goal in mind, for a particular period of time, exit matters.

I know you can afford to stay invested as long as the exchanges exist, to some extent I can too :grin:

My point was more towards not educating the investors about the fall in the middle or in the end of their journey which could potentially wipe out all the gains, and if they don’t have time on their side, they may have to redeem at lower NAV. This possibility very much exists for those who are investing for a goal.

For those who have time on their side, like you say, even long term is short term :grin:

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Yes, Equity needs rebalacing . I don’t buy the idea that fundamentals work(it changes overnight, we can see with SVB bank etc)and put money and forget.It can work for debt or gold that will just protect your capital against inflation not grow you wealth.

We are living in times of disruption and fundamental changes overnight so quick rebalancing will only save you. So, for any equity investment, Exit is also very important.

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I second that.

only debt and death are certain. A 2060 6.99% GOI bond will give you assured returns even if we are at war, recession or even existential event even if govt. is insolvent.

equity mutual funds has a chance to outperform, over the past it has outdid every single year if a 5 year period is considered. But its only a chance.

Imagine if we are in Ukraine now - what would have given you stability equity or debt?

so its very important that our country does not screw up to have returns on equity.

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I believe sip is a concept invented by fund managers to ensure regular income for themselves.
No matter how much experts advise not to time market, I think learning to time it is necessary. We cannot catch exact tops or bottoms but can buy in staggered form if indices have corrected significantly from highs or vice versa.
If we cannot do this, better to stay with fixed income products

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