How does compounding workCompounding is the method through which an investment's interest is added to the principal by being invested alongside the original investment. It differs from simple interest since it is paid on both the principal and the interest. Although the concept of compounding is applicable to shares and firms, there isn't any compounding in stocks on the lines of a typical bank account, where the interest rate is fixed. By choosing the growth option, where the fund manager reinvests the profits made in the underlying plan, mutual funds take advantage of the concept of compounding. As a result, returns are higher than one might anticipate from the dividend choice of the fund.

Source: Dainik Jagran June 12, 2023 04:25 UTC