I'm listening in every videos that compounding is magic. I know compounding is magic and it works like in Fixed deposit but how it works in shares or mutual fund.
Ans: Absolutely, compounding is indeed magical, and its power can be harnessed not just in fixed deposits but also in shares and mutual funds.
In shares or mutual funds, compounding works when you reinvest the returns you earn. Here's a simple explanation:
Let's say you invest Rs. 1,00,000 in a mutual fund with an annual return of 12%. In the first year, your investment grows to Rs. 1,12,000 (1,00,000 + 12,000). Now, if you don't withdraw this amount and instead reinvest it, the next year's return will be calculated on Rs. 1,12,000, not just on your initial investment of Rs. 1,00,000.
Over time, this compounding effect accelerates your earnings. The longer you stay invested, the more significant the impact of compounding becomes, turning your small, regular investments into a substantial amount over time.