One of the key investing mantras to ensure wealth creation is to stay invested in stocks and mutual funds over a long period of time. Wealth advisors often point out that compounding gives disproportionately higher returns on an investment.
This means when you remain invested in an asset class over a long tenure, the return on invesment (ROI) in the later years tends to be higher than in the early years. This happens because the returns generated in the first few years get added to the initial investment, thus letting the base swell in later years.
This spike in corpus on account of tenure is attributed to the phenomenon of compounding. It is so well-known and potent a tool that it is also referred to as ‘magic’, albeit metaphorically. Interestingly, famous scientist Albert Einstein referred to compounding as the “eighth wonder of the world.”
We demonstrate the power of compounding by handpicking one mutual fund scheme and observing its growth since inception: Invesco India Contra Fund.
It is a mutual fund scheme which follows a contrarian investment approach and invests in fundamentally sound companies that are available at attractive valuations. The scheme was launched on April 11, 2007.
(Source:Invescomutualfund.com)
As we can see in the table above, if someone had invested ₹one lakh one year ago, the investment would have grown to ₹1.06 lakh. In a three year period, the same investment would have grown to ₹1.58 lakh.
If an investor had invested the same amount five years ago, the investment would have grown to ₹2.39 lakh. And if the tenure were seven years long, the investment would have risen to ₹2.48 lakh. In a span of 10 years, an investment of ₹one lakh would have risen to ₹3.62 lakh.
So, if an investor had decided to invest ₹one lakh when the scheme was launched for public i.e., on April 11, 2007, the investment would have grown to ₹11.57 lakh by now, which is over 11 times of investment in a span of 17-18 years. This converts to an annualised return of 14.70 percent.
About the scheme
This scheme follows contra strategy which means following contrarian investment strategy with at least 65 per cent in stocks. The mutual fund scheme has a total asset size of ₹16,292 crore (as per latest AMFI data). The scheme has 97.5 percent in equity and rest in cash.
Top constituent stocks of the scheme are HDFC Bank, ICICI Bank, Infosys, Axis Bank, M&M, Apollo Hospitals, Zomato, NTPC and L&T.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.
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