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How Compounding works in Mutual Fund:-
In growth funds the concept of compounding works notionally. They invest in stocks and keep selling and buying and any profits go towards adding the value of units and losses deduct its value.
Suppose a fund starts with the corpus of Rs. 100 crore and after doing miscellaneous transactions its value adds Rs. 15 crore in profits after adjusting expenses and losses, and its corpus grows up to Rs. 115 crore (presuming no fresh contribution or redemption) then the NAV of the underlying units would appreciate as much, that is by 15%.
If you had purchased a unit at Rs. 10 then its NAV will grow to Rs 11.5. If you redeem your return will be 15%. Suppose you keep the units and these double in NAV in 6 years then your return will be 12% compounded. If the value doubles in 5 years that is equivalent to 15% return. If it doubles in 4 years the return will be equivalent to 18% compounded.