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Do I get the same compounding returns as that of mutual funds from direct equity

If I invested 10000 pm in MF & assuming 20% CAGR. Suppose I invest this same amount in direct equity with a same 20% assuming returns then what is the difference between them I mean can I get compounding returns in direct equity, like a MF?

Sep 6, 2016 by S R Jain,   |   Mutual Fund

If you remain invested over long period of time in both – mutual funds and direct equities - you benefit by the time period of your holding. As there is no fixed interest pay out, we cannot say that it will compound at a certain rate and thus you will get a certain amount after a specific period due to compounding over a period of time.

The magic of compound interest are summed up as the concept of interest earning on interest. Basically, compounding in context of mutual funds and equities, can be defined as a long term investment strategy. For example, when you own a mutual fund or equity share, compounding allows you to earn return on your principal investment. Compounding also occurs when you reinvest your earnings. In the case of mutual funds, this means re-investing your dividends and bonus, and receiving additional units in lieu of that. By doing such a thing, you are earning a return on your returns and the principal. When the principal is combined with the reinvested returns, your investment grows at an increased rate and thus this can be called compounding.

In case of equity shares the same thing applies. Only difference is that dividends are not reinvested automatically, therefore, to actually get the compounded returns even on your dividends you might buy shares worth the value of dividends. Thus buying more shares will help your investment grow in value over a period of time and benefit from compounding.

Having said that, retail investors like you should always take mutual fund route to invest in equities instead of investments in direct equities.

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