Investing is often seen as a complicated and daunting task, but it is crucial to plan for the future and secure financial stability. One of the simplest and most effective ways to invest is through compound interest. The power of compound interest lies in its ability to generate substantial returns over time, even from small initial investments.
Compound interest is interest calculated on the initial principal and the accumulated interest from previous periods. The more frequently interest is compounded, the faster the investment grows. The key to unlocking the power of compound interest is to start early and be consistent with investments. Small contributions made regularly over a long period of time can result in substantial growth.
For example, if you invested Rs. 5000 per year for 30 years at an annual return rate of 8 per cent compounded annually, you would have a total investment of Rs. 1,50,000 and a final value of Rs. 8,26,385. The growth of the investment can be attributed to the power of compounding, where the interest earned in the earlier years is reinvested and grows along with the initial investment.
Savings accounts, fixed deposits, and mutual funds are just a few examples of investment vehicles where compound interest can be applied. The investment will need more time to grow, and the ultimate returns will be higher, the sooner one starts investing. To fully profit from compounding, investment requires a disciplined and persistent approach.
In India, there are various investment options that offer the power of compounding. For example, the Public Provident Fund (PPF) is a popular investment option for those looking for long-term savings. The PPF offers a fixed rate of interest, currently 7.1 per cent, and is compounded annually. The investment grows tax-free and the maturity period is 15 years.
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