Compound interest is calculated using the principal amount and interest. Hence, it can increase your financial corpus significantly.In this article, we will explain what compound interest is and how it can help you increase your returns.
A lot of investors don’t understand the importance of compound interest. It allows money to grow exponentially over time. Furthermore, it can be very beneficial for investors who start investing early. This is because the more time an investor allows his/her investment to grow, the more benefit compound interest can provide. Compound interest is calculated by adding the principal amount and the interest. Hence, the investment keeps increasing. Thus, the returns also increase.
Let’s take a look at an example to understand compound interest-
You start investing at the age of 18. You plan to retire when you are 65 years of age. Thus, you have 47 years to save and invest your money.
You decide to save Rs. 100 every month for the next 47 years. After 47 years, you’ll have saved Rs. 56,500.
But if you decide to invest the same amount in an investment instrument that allows compound interest, then the accumulated corpus at the end of the tenure can be very high. For instance, the investment provides an average annual return of 7%, which is compounded every day. In this case, you will generate a corpus of Rs. 4,45,559 after 47 years.
How Compound Interest Helps Investments
Due to how compound interest gets calculated, it can provide you with substantial returns. However, it is wise to stay invested for a longer term to grow your returns. The more the number of compounding periods, the higher the returns you can earn. However, if you withdraw any money during the tenure, then it can lower your returns.
Why You Need to Start Investing Early
One of the most important factors in compound interest is time. The more time you stay invested, the higher your returns can be.
By investing early, you can avoid taking excessive risk and achieve maximum growth. For instance, if you are in your 20s and plan to start investing to build a retirement corpus, then you can choose low-risk investment options as you have 30-40 years to accumulate the funds. By investing early, you get more years to stay invested, and you can take less risk and allow your investment to earn stable returns. But if you don’t start investing early, then you might have to choose high-risk investment options to generate your retirement corpus.
What are Compound Interest Investments?
Most experts recommend investing in investment instruments that allow compound interest. It is a great way to earn substantial returns.
There are various investment options that compound interest at regular intervals. Unit-linked insurance plans (ULIP) and mutual funds are few investment options that allow compound interest. It is wise if you consider investing in such investments while planning your retirement.
Compound interest can help you earn high returns and build a huge corpus. However, you need to stay invested for a longer time.