It can work in equity too. Keep tracking the main indices of the market (Sensex, Nifty50, Nifty Next 50). These indices keep correcting themselves by about 5-10% at least once every year. Whenever correction happens, make lumpsum investments in good index funds/ index-linked ETFs. After buying, hold on to them for the next 20 years. Idea is to let your return compound by keeping your money invested.
how can we be so sure?
Dow jones 1929 to 1954 - 9191 days negative returns
If you were 30 years old when you invested at 1929, then by 55 years your amount has just breakeven. Considering inflation, currency devaluation - you have lost !
Nothing is predictable !
entry & exit are important. You enter every time there is a correction. Exit has to be planned - well before you need the money for your goals - when the mkts are peaking.
a simple example: Even if you had entered in March 2020 & planned your exit in 2021/2022, you would have almost doubled your investment. Similarly there will be many years in between, mkt could be negative/ flat… then some years they will boom. Overall over 15-20 years, one will do well. What is more imp is start early, have a disciplined approach & stay invested.
I would also agree,Equity is not to be sleep upon.Its wealth building process as your real owner of actual business, Tangible things . Exit is very very important as well same as entry.
In todays world , with so many asset class we can park and rotate its important to be a multi asset investor rather than only Equity. We have see QE where it was free money now we are moving to tightening after 2 decades , so new cycle of money supply is starting.
Compounding to the best of my knowledge with regard to equity is the corporate action mainly dividends which accrues on a yearly basis which gets reinvested. Does this happen at mutual fund or etf. Yes it does.
When this amount gets reinvested the unit holder gets the benefit. This accruals happens every year. So the concept of compounding happens.
The market price is a different animal. What happens whether the person gets rewarded when she/he sells is a different aspect and has nothing to do with compounding. For the year ended 2021 sbi nifty etf generated a total dividends of 11 crores. Only dividends and interest. There are other elements in the profit and loss statements and i am not aware if this comes to unit holders. Anyways, what we know for sure is this 11 crore after meeting expenses will be re deployed into buying additional shares But this increase may not be that visible and clear in a mf or etf as marjet price is dynamic and changes every minute.
The way compounding functions is very clear in a bank fd.
I really only want to know who these youtubers are! Honesty can’t imagine someone talking about finance without knowing what compounding means
(Lump sum or sip has nothing to do with compounding)
Instead of seeing dividend we should see what is retained by the company. That actually add to the value of the company when they use those funds to generate more returns. Their fair value (fundamental value) increases. When MF have such companies in their scheme whose value is determined by the value of the companies, obviously there is compounding.
In addition to that as your have rightly mentioned, MF even re invest the dividend that is received by them from the companies. So the compounding is actually more in MF than in direct investing because we may or may not re invest that dividend.
The problem here is market price is driven by demand and supply but that doesn’t change the fundamental value of the company.
this was what i was trying to say… missed the main point only…
you phrased it very nicely @neha1101
Compound interest is “interest” on “interest” and applies to interest bearing investments. BUT “compounding” itself is basically “return” on “return”. And this wholly and truly applies to Mutual Funds, both negatively and positively.
If your base is high and the NAV goes 5% higher, then effectively value of your investment goes 5% higher than the base.
If your base is high and the NAV goes 5% lower, then effectively value of your investment goes 5% lower than the base.
Compounding is not some magic rule - its just math!