Compounding magic: A ₹10K monthly SIP in this mutual fund would today be worth ₹3.7 crore.

Compounding is one of the main tenets of wealth creation. This implies that over an extended period of time, little regular input can result in enormous growth. Expert wealth consultants frequently claim that the time period for which an investment is locked in can create enormous wealth, not the moment of the transaction.

This occurs as a result of dividends paid on early-stage investments, which are added to the principal. Returns are accrued over time on the increasing amount, which also includes dividends paid out over a few years. The corpus keeps expanding as earnings continue to rise with each new year.

Here, we hand-pick one mutual fund, the Tata Large & Mid Cap Fund, to illustrate the power of compounding. This plan was introduced on February 25, 1993.

It would have dropped to ₹1.16 lakh if someone had invested ₹10,000 per month for a year through a systematic investment plan (SIP), for a total investment of ₹1.20 lakh.

This is due to the fact that the financial markets, which are currently down 16 percent from their high, have been under tremendous pressure for the past few months. However, the total investment would only be ₹3.6 lakh, but the investment would have risen to ₹4.45 lakh if an investor had continuously invested ₹10,000 through SIP for three years. The initial investment of ₹6 lakh would have increased to ₹9.31 lakh over a five-year period.

And it would have risen to ₹3.71 crore if someone had consistently invested ₹10,000 through SIP in this program since its beginning. Since its inception in 1993, this plan has produced an annualized return of 17.38%, according to data on tatamutualfund.com.