Three primary factors influence your returns from compounding.
Compounding Interest Rate
Interest earned on the investment or the returns generated by your asset.
For instance, suppose you invest in fixed deposits, the interest rate offered by your bank or financial institution is the compounding interest rate.
The time you give your investment to grow. The more time you let your investment build upon itself, the more it will compound.
The government effect on your investments. The tax rate applied to your investment reduces the compounding impact on it.
Suppose your investment is tax-free or you are expected to pay tax only at the time of maturity. In that case, you will be left with more money than if you pay tax annually.
Suppose you invest ₹10,000 in various investment vehicles (assuming tax rate at zero), the compounding effect of your investment over the years may be:
Return on Investment (approx)
Value in 10 years
Value in 20 years
Value in 30 years
Note: These return on investment percentages are for illustration purposes, and no investment decision should be made based on them.
How To Harness The Magic of Compounding?
Here are some practices you can follow to benefit the most out of the power of compounding on your investments.
1. Start Investing Early
As some experts say, the best time to start investing was 10 years ago and the second-best time is now.
The earlier you start investing, the more time you will afford to give your investment to grow. Thus, enabling it to compound and grow your wealth over a period.
2. Stay Committed
Consistency is the key.
Whether you earn less or more, it is advisable to make a habit of investing a certain sum of money. If you stay committed to investing consistently, the power of compounding will work magic on your investments.
3. Patience is the key
Many investors look for quick returns in a short period. While it is not wrong to make money quickly, it does not work well for many.
It would help if you allowed your investments to build upon themselves, without interfering from time to time.
Once you invest a sum of money into an investment, it is better to leave it alone. Over time, when undisturbed, the initial investment will grow substantially.
The term ‘Power of Compounding’ may sound overwhelming to many. But, you need not be a math genius or a financial wizard to understand and take advantage of this force.
Like we discussed earlier:
Compounding is a simple concept. It merely means, interest earned over interest leading to substantial returns over time.
So, what is holding you back?
Go ahead and feel the magic of compounding on your investments.
KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.