Does Investing in Mutual Funds for a Longer Period Yield Higher Returns?
Yes, the longer you invest in mutual funds, the higher the returns you can achieve. This is due to the power of compounding, where your returns earn additional returns over time. Let’s understand this concept with an example.
Balakrishnan has three children: Kavita, Rajesh, and Arjun. He decided to give each of them Rs. 50,000 on their birthdays, with the condition that they invest it until the age of 65. All three agreed but followed different strategies.
Now, let’s see who accumulated the most wealth by the age of 65.
1. Kavita: She invested her birthday gift from her 20th to her 28th birthday (8 years) and then stopped investing. She spent her money as she pleased in the subsequent years.
2. Rajesh: He spent the money he received between his 20th and 27th birthdays but started investing on his 28th birthday. He continued investing until his 36th birthday (9 years).
3. Arjun: He also spent the money received from his 20th to 27th birthdays but began investing at 28 and continued until the age of 65 (38 years).
Now, let’s see who accumulated the most wealth by the age of 65.
| Name | Years Invested | Total Investment | Return Rate (12%) | Wealth at 65 |
|---|---|---|---|---|
| Kavitha | 8 years | Rs. 4,50,000 | 12% | Rs. 4.89 crore |
| Rajesh | 9 years | Rs. 4,50,000 | 12% | Rs. 1.98 crore |
| Arjun | 38 years | Rs. 19,00,000 | 12% | Rs. 3.05 crore |
Conclusion:
Although Kavita invested for only 8 years, she accumulated more wealth than Rajesh and Arjun because her investments had more time to compound. This highlights the incredible power of compounding—even small amounts can grow significantly if invested for a longer duration.
The lesson? Start early and stay invested for the long term to maximize your returns!
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