Power of Compounding

Many of us may have heard about the concept of compound interest. However, it starts only when we start managing our finances as working adults that we understand the impact and power of compounding.

Power of Compounding

The knowledge of the power of compounding not only helps you to earn a higher return on your investments and savings but also helps you to plan for your life’s important milestones.

The power of compounding helps increase your savings by accumulating more interest on money that was previously earned as interest.

What is the Power of Compounding?

Power of compounding is essentially an act of ‘adding interest on interest’ i.e. the amount of money invested, will generate earnings from both the initial principal amount and the accrued earnings from preceding compounding periods. Eventually, the power of compounding helps to grow your wealth over a certain period.

The most important aspect of the power of compounding is that your investments accrue interest on both the base capital and the previously earned interest. As an investor, you must keep in mind that the power of compounding lies in its ability to reinvest earnings on your investment. It means that you should not look to withdraw your returns due to short-term fluctuations.

Direct vs regular mutual funds

A direct plan is what you buy directly from the mutual fund company, whereas a Regular plan is what you buy through as an advisor, broker, etc.

Direct vs regular mutual funds

Direct Mutual Funds

Direct mutual funds are a type of mutual fund that is directly offered by the AMC or fund house. There is no involvement of third-party agents in the direct mutual fund. Therefore, since there are no third-party agents involved, there are no commissions and brokerage. Thus, the return is higher due to a lower expense ratio.

The NAV is higher than a regular mutual fund. The market research is done by you only.

Regular Mutual Funds

Regular plans are those mutual funds that are bought through an intermediary. These intermediaries can be brokers, advisors, banks, s, etc. These intermediaries charge the fund house a certain fee for selling their mutual funds.

The expense ratio for regular mutual funds is higher as compared to direct mutual funds.

There is the involvement of a third party in a regular mutual fund. NAV is lower than direct mutual funds.

Regular mutual funds are best suited for investors who seek assistance. Even though regular plans seem costly when it is compared to direct mutual funds. A small percentage of the additional cost is worth enough for the right investment decision.

Can NRIs invest in Indian Mutual Funds?

Yes, NRIs can invest in Indian mutual funds. A lot of people in India are either coming back to India or going out. There is a certain need for a lot of investors whether they want to return to India or just benefit from the growth of the Indian economy.

Can NRIs invest in Indian Mutual Funds?

Indian taxation system does not distinguish between NRIs. However, residents of the USA and Canada are treated differently because these countries impose specific requirements for mutual fund companies. There are a few mutual funds that have complied with those requirements.

As far as Indian taxation goes, NRIs are imposed TDS and the same does not apply to resident Indians. The countries that have a bilateral tax treaty with India, NRIs resident of those countries can claim back any additional tax.

Let’s now look at the asset categories that may be good options for NRIs.

Debt

Indian banks are better placed in comparison with mutual funds. The tax advantage and higher interest rate with almost guarantee of the return make FDs better. As NRI, you should prefer a fixed deposit with a good bank.

Equity

This is where you are at an advantage. There are plenty of options that can favor your investment growth. You can select one index fund or a combination of two funds in a large-cap category. Similarly, you can invest in two small-cap and two mid-cap funds. This combination of a mutual fund over a course of time should create a reasonable return.

Gold

If you are investing for a certain goal to be met in India, this category y investment may maybe suitable. Purely from investing standpoint, the gold mutual fund may not be an exceptional option.

The real risk of investing in India is the currency risk. There is only a historical basis for knowing that INR depreciates in comparison with USD, the same may or may not hold. Assuming the same holds, still India offers 4-5% more than the USA considering the currency risk. This can be achieved only if the selection of funds is excellent and rotated well.