MPF Investment

Principles of Fund Investment

Compounding Effect

What is the compounding effect?

This refers to the snowball effect created by rolling over the principal and investment returns for continuous investment to generate greater returns.

Example:
A young man starts to make monthly investments of $1,000 from the age of 20. Assuming the net annual rate of return is 5%, after 20 years of rolling over the capital plus the investment returns, he will have accumulated $410,000 at the age of 40. If the investment period is as long as 40 years, he will have accumulated $1,530,000 at the age of 60. Although the investment period has only doubled, the additional amount accrued is almost three times as much. Through the compounding effect, the more he invests per month, the more he can enjoy the power of the compounding effect and the greater amount of retirement savings will be accumulated.

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How to make the best use of compounding effect

The compounding effect may not be obvious at the beginning, because it takes time for the principal to generate returns. The earlier scheme members start to invest in MPF funds, the longer the investment horizon will be available for the principal and returns to roll over, and the more they will benefit from capital appreciation and returns.