Mutual Funds: What Really Drives Compounding? Buy and Forget vs. Reshuffle and Grow

When it comes to investing, one word that excites every investor is compounding.

The idea that “your money makes money, and then that money makes more money” is powerful enough to lure people into long-term investing.

But along with the fascination comes a common fear: What if I reshuffle my mutual funds? Will I lose all the compounding benefits I’ve built up over the years?

This fear has been quietly reinforced by industry slogans like “buy and forget” or “long-term wealth creation comes only with patience.”

But here’s the truth—while patience is absolutely essential in investing, the belief that reshuffling destroys compounding is a myth.

So let’s break this down in simple terms: what is compounding, why investors fear losing it, and why switching funds doesn’t mean starting all over again.

Table of Content

• What Exactly is Compounding?

• The Fear: Does Reshuffling Break Compounding?

• The Reality: Reshuffling Doesn’t Stop Compounding

• Then Why Do Investors Feel Compounding is Lost?

• When Reshuffling is Actually a Good Thing

• A Simple Analogy

• When Reshuffling Can Hurt

• How to Reshuffle Wisely

• The Bottom Line

What Exactly is Compounding?

Think of compounding as a snowball rolling down a hill.

The longer it rolls, the bigger it gets—not just because of the original snow, but because it keeps adding more and more along the way.

Let’s put numbers to it. If you invest ₹1,00,000 at 10% annual growth:

• After 1 year → ₹1,10,000
• After 2 years → ₹1,21,000
• After 3 years → ₹1,33,100

That extra growth each year comes not only from your original money but also from the returns that are reinvested.

That’s compounding. And the formula behind it is simple:

Future Value = Present Value × (1 + r)^n

(where r is return rate, and n is years invested)

This is why seasoned investors say: “Time in the market matters more than timing the market.”

The Fear: Does Reshuffling Break Compounding?

Here’s where many investors get nervous. They think:

• “If I sell now, I’ll reset compounding to zero.”
• “Switching to a new fund will wipe away the growth history.”
• “The magic works only if I never touch my investments.”

It sounds logical on the surface, doesn’t it? But in reality, compounding doesn’t care which fund you are invested in.

It only cares that your money stays invested and continues to earn returns.

The Reality: Reshuffling Doesn’t Stop Compounding

Let’s test this with an example.

Suppose you put ₹1,00,000 in Fund A earning 10% a year. After 5 years, it grows to ₹1,61,051.

At this point, you decide to switch the entire amount to Fund B, which also earns 10% annually.

After another 5 years, your money in Fund B grows to:

₹1,61,051 × (1.10)^5 = ₹2,59,374

Now compare this with leaving your money untouched in Fund A for 10 straight years at the same 10% growth:

₹1,00,000 × (1.10)^10 = ₹2,59,374

The outcome? Exactly the same!

The reason is simple: compounding happens on the base value of your money, not on the fund itself.

By reshuffling, you’re not “resetting the clock”; you’re simply carrying forward your accumulated wealth to another vehicle.

Then Why Do Investors Feel Compounding is Lost?

This misconception has three big drivers:

1. Psychological Anchoring – Investors often anchor themselves to the original start date. When they move money after 5 years, it “feels” like starting afresh, even though they’re moving forward with a larger base.
2. Industry Messaging – Fund houses thrive on long-term investors because it guarantees them fees. Naturally, they keep emphasizing “don’t touch your portfolio.” While the message promotes discipline, it unintentionally fuels the myth that reshuffling breaks compounding.
3. Unfair Comparisons – Imagine two friends: one invested 10 years ago, and another started only 5 years back but reshuffled midway. The latter may feel like they’re behind—but compounding is personal. What matters is whether your money is still invested, not the fund’s age.

When Reshuffling is Actually a Good Thing

If reshuffling doesn’t break compounding, should you switch funds all the time? Of course not.

But in certain cases, reshuffling is not just okay—it’s smart. For example:

• Changing life goals – Maybe you were saving for a house, but now your focus is children’s education. Your portfolio needs to reflect that.
• Asset allocation drift – If equities grow faster than debt, your portfolio may get riskier than you’re comfortable with. Reshuffling helps restore balance.
• Consistent underperformance – A fund that lags behind peers and benchmarks for years may be dragging you down.
• Risk tolerance changes – As you near retirement, shifting from equity-heavy funds to safer debt options is wise.

In all these scenarios, reshuffling helps ensure that compounding is working for you—not against you.

A Simple Analogy

Think of your investment journey like a train ride.

You’re headed to a destination 500 km away. For the first 200 km, you travel on Train A.

Midway, you switch to Train B to cover the remaining 300 km.

Does changing trains mean you’ve gone back to the starting station? Of course not.

You’re still moving forward, just with a different carrier.

That’s exactly how compounding works when you reshuffle funds.

When Reshuffling Can Hurt

Now, here’s the tricky part—reshuffling is not inherently bad.

But just like adding too much spice can ruin a good dish, unnecessary or poorly timed reshuffling can spoil your investment journey.

So, when does it actually backfire?

• Exit Loads & Taxes – Imagine shifting your money around like changing buses every two stops. Each time you exit, there’s a cost—exit loads, capital gains tax, and sometimes even higher slab implications. These small leaks might look harmless individually but add up over time, quietly eating into your returns.
• Over-Trading – Are you constantly chasing the “next best fund” because it topped the charts last year? That’s like buying a phone just because it was trending last month. More often than not, investors end up buying high (when everyone’s hyped) and selling low (when panic sets in). Over time, this behaviour doesn’t just hurt compounding—it demolishes it.
• Emotional Reactions – Picture this: markets dip, panic rises, and suddenly reshuffling feels like the safest option. But acting out of fear often leads to shifting into the wrong assets at the wrong time. The result? You miss the recovery phase that could have boosted your wealth if you had just stayed put.

In short, reshuffling for the wrong reasons is like changing lanes in traffic every few seconds—you don’t necessarily reach faster, but you definitely add more risk and stress.

How to Reshuffle Wisely

So, does this mean you should never reshuffle? Not at all. The key is to do it with discipline and purpose, not emotion.

Think of it as servicing your car—you don’t do it every week, but you also don’t ignore it forever.

Here’s how to strike the right balance:

• Review Once a Year – A yearly review is like your annual health check-up. It helps you see whether your portfolio is still aligned with your goals. Every month? That’s overkill.
• Focus on Long-Term Goals – Ask yourself: “Will this reshuffle bring me closer to my 10- or 20-year goal, or is it just because the market looks tempting right now?” If it’s the latter, pause. Investments are meant to serve your goals, not your impulses.
• Consider Tax Implications – Sometimes staying put saves you more than switching. A tax-efficient decision today can give you compounding power tomorrow. Why pay the government more than you need to?
• Stick to Asset Allocation – Instead of obsessing over individual funds, keep your eye on the bigger picture—your equity-debt mix. That’s your compass. Whether it’s 60-40 or 70-30, sticking to the allocation matters far more than whether you hold Fund A or Fund B at the moment.

In essence, smart reshuffling is about pruning the garden when needed, not uprooting the whole tree.

The Bottom Line

Compounding isn’t loyal to one fund or one investment product—it’s loyal to your money.

Whether you hold a fund for 20 years or switch midway, your wealth continues to compound as long as it stays invested.

The real danger isn’t reshuffling—it’s pulling money out prematurely or letting it sit idle.

And remember, while DIY investing has its appeal, making these decisions without a proper plan can be tricky.

That’s where a Certified Financial Planner (CFP) can guide you—helping you decide when reshuffling is beneficial and ensuring your money compounds in the right direction.

So next time someone says, “Don’t touch your portfolio or you’ll disturb compounding,” ask yourself: Isn’t compounding tied to my money, not to a single fund?