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“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Albert Einstein

At first this quote might seem like a bit of an exaggeration but the math behind it shows that it is not.

The concept of compounding power involves the practice of ‘accumulating interest upon interest.’ This means that the money you invest will yield returns not only on the initial principal amount but also on the previously accumulated earnings from previous compounding periods.

Multiple investment vehicles, including fixed deposits and mutual funds, utilize a process of reinvesting your funds’ earnings, whether derived from interest or capital gains, with the goal of producing additional profits over time.

How Can You Improve Your Savings with Compounding Benefits?

Make an early start

The more time you keep your investments untouched, without making withdrawals from your returns, the more your money can grow, thanks to the exponential increase in the power of compounding over time.

Investment Amount
(in Lakhs)
Rate of Return p.a.Age at which Investment is madeAge at which Investment is withdrawnCompounding Period (Years)Value of Investment
(in Lakhs)
510%45 Years60 Years1521
510%40 Years60 Years2034
510%35 Years60 Years2554
510%30 Years60 Years3087

Shorter tenors have greater compounding impact

Compounding frequency, the rate at which interest multiplies, varies among investment options. Choices include daily, monthly, quarterly, bi-annually, or annually. Shorter compounding intervals have a more pronounced effect on investment growth, highlighting another facet of the power of compounding.

Investment AmountRate of Return p.a.Compounded FrequencyTenorCompounding PeriodsValue of Investment
10000012%Annual5 Years5176234
10000012%Half yearly5 Years10179085
10000012%Quarterly5 Years20180611
10000012%Monthly5 Years60181670

Be disciplined and patient

Building a strong investment portfolio begins with setting clear priorities and maintaining discipline. Leveraging the power of compounding is essential for maximizing returns. Regardless of your income, take time to define your goals and preferences. This understanding is key to harnessing the advantages of consistent, long-term investments and the role of compounding.

Choose the right instruments or fund

While you might lack the expertise of an experienced stock investor, don’t assume that the power of compounding isn’t accessible to you. Although equities can be volatile, they historically offer strong inflation-adjusted returns over time. Consider using stop-loss strategies to limit potential losses in your investments.

Photo by WantTo Create on Unsplash

Cinnamon Wealth

Author Cinnamon Wealth

"Catalysing Financial Freedom" Cinnamon Wealth curates solutions for Women & their family's unique financial needs.

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