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Aditya Birla Sun Life AMC Limited

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    Aditya Birla Sun Life AMC Limited

    Staying the Course: Long-Term Perspective and Discipline in Compounding and Diversification

    Sep 05, 2024
    5 min
    4 Rating

    Diversification and compounding strategies are the two sides of the same coin that can bring potential long-term returns on mutual fund investments. Investing in mutual funds is the game of patience, and these strategies can help you in the long-run. So, to put away any doubts about the long-term investing with the help of diversification and compounding strategies, you should first realize the importance to stay committed to your investment strategies.

    A proactive investment mindset and a financial discipline together can benefit your financial goals. These two principles can smoothen the mutual fund journey towards your long-term benefits.

    What is the diversification strategy in the mutual fund portfolio?

    The diversification strategy involves the allotment of multiple different assets for the investment in a mutual fund. The fund manager invests the collected capital from the investors in stocks, debts, bonds, etc. This diversification can promote a healthy mutual fund profile to deal with a market volatility.

    Also Read: 5 ways to become worry free about market volatility

    Diversifying your portfolio can make the most out of the market. The fund manager assesses companies’ performances or commodities’ demand-supply chain in the market to make better investment choices. Hence, investing in different securities for longer period can bring you profit.

    Here’s one example.

    Your mutual fund portfolio consists of stocks, commodities, debts, etc.

    You stayed invested in a few large-cap companies and small-cap companies for a longer period. During those years, the market remains subjected to many fluctuating periods, affecting the stock values of the companies. The large-cap companies with the market capitalization might give reasonable returns on your investments. The small-cap companies may perform better when the market conditions are good. As a result, you earned from the both ends.

    On the contrary, the stocks performed averagely, but the said years saw a huge demand in the commodities like Gold or Silver. You can benefit in spite of the average stock performance as the Gold market is performing.

    To comment, this long-term diversification strategy can take all possible advantages from the market conditions to provide potential long-term returns.

    Why compounding strategy is important?

    The compounding strategy is the process of earning additional returns by reinvesting your investment earnings. This strategy can appreciate your capital wealth by repeating it for a longer period.

    Investors can earn from the Income distribution cum capital withdrawal (IDCW) on the mutual fund investments. You can redeem this amount or reinvest the amount. The compound interest is given on the principal amount and the additional interest, unlike simple interest applicable only to the principal amount. Therefore, the interest on the principal amount is added back to the original value and the new return is generated based on this new principal amount.

    Also Read: Unleash the Power of Compounding in Your Investment Portfolio

    Conclusion

    Do not get discouraged due to the poor market performance for the time-being. A short-term loss is still acceptable if you can gain long-term benefits. To conclude, don’t be the impatient hare from the classic story who misses his win. Be the slow and steady tortoise, who with dedication and discipline, achieves his goal of winning the race.

    Aditya Birla Sun Life AMC Limited/Aditya Birla Sun Life Mutual Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.