I was reading an article where it was mentioned that 50% of the investors withdraw their amount from MF within 1 year. That means only half of the people who invests in the mutual fund remain invested for more than a year. This is actually bad because when you remain invested for a longer period then only you will get the real benefit of compounding.
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For example, if someone invests Rs 10K first year and he earns Rs 1K as gain and his mutual fund portfolio goes to Rs 11K. If he withdraws that he gets Rs 1K as profit. For the simplicity I am not taking into account any taxes. So what people have done they have realized their profits and their profit is at Rs 1K. But the problem is he is missing out on compound interest. For example, if he remain invested for one more year, he might end up getting Rs 12.1K if the XIRR is 10% for both yhe years. He has get an extra Rs 100 for the Rs 1K profit he got in the first year.
Even though the compound interest or the interest on interest is small Rs 100 only, you will see the real magic after 5 to 6 years when the interest alone goes above your principle and in 4 years your money will be almost 4 times.
So when people withdraw their money after an year, they are actually losing the compounding benefit. Now someone will say that they might need the money and that's why they have withdrawn it.
I can understand it,but actually it's a risky affair to invest in equity MF for a short term I.e. for 1 year. For that best is FD. I know FD doesn't give us good percentage but with MF your money might give negative return in short terms which is not the case in long term. And that's why equity MF is best for long terms.
8 have been investing in MF for the last 7 years and I can see the compounding affect now. My profits are almost 40% of my total investment. And soon the profit will reach to 100% and thus from there on the compounding will explode like anything.