Through Power of Compounding, you can build a huge corpus with even a small amount of your savings over a long period of time and meet all your needs.
Power of Compounding: Power of compounding is a good rule of investment savings. If you understand the formula of compounding in investment properly, then you can get manifold returns on your money. Through this, you can create a huge corpus in a long period with even a small amount of your savings and can meet all your needs. For this, it has to be taken care that you start financial planning as soon as possible. At the same time, your investment goal should be long term. Those options must be considered before investing, where there is a possibility of getting higher rate of return. Because in the long run, even a 1% difference in returns can cause you a loss of lakhs. At present, one can opt for lump sum investment in mutual funds or mutual fund SIP to get the right benefits.
What is Power of Compounding?
It can be understood in such a way that the earnings that you earn on investing somewhere, it is also compounding to reinvest it. In this, you get interest on the principal along with its interest. Where compounding is a great way to increase your investment. For example, if you invest Rs 1 lakh and get a return of 10 percent per annum, then it will be Rs 110000 after one year. Next year, 10% interest will be available on the same Rs.110000. And like this till the maturity period, you will continue to get interest on interest.
Bigger loss than 1% difference in returns
Case-1
Principal: Rs 5 lakh
Interest rate: 7 percent
Duration: 20 years
Amount on Maturity: Rs 1934842
Case-2
Principal: Rs 5 lakh
Interest Rate: 8%
Duration: 20 years
Amount on Maturity: Rs 2330438
Case-3
Principal: Rs 5 lakh
Interest rate: 9 percent
Duration: 20 years
Amount on Maturity: Rs 2802205
Case-4
Principal: Rs 5 lakh
Interest Rate: 10 percent
Duration: 20 years
Amount on Maturity: Rs 3363750
Note: It is clear here that if there is a difference of 1 percent in the return rate, then there can be a big difference on your maturity amount.
more profit in the long run
The benefit of Power of Compounding will be more when your investment is of long duration. So it is better to focus on investing and saving as soon as possible. The sooner you start investing, the more you will get the benefit of compounding. It can be understood in such a way that if you have done a monthly SIP plan of Rs 5000 for 10 years. If you get 10 per cent annual return, then after 10 years you will get a fund of Rs 10.5 lakh. But if this investment is for 20 years, then the maturity amount will be Rs 38.3 lakh on the same monthly investment and rate of return.
(Note: Based on conversation with AK Nigam, Director, BPN Fincap)
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