Categories: Market

Compound Interest on Investment

Compound Interest on Investment– Everyone wants to be rich with as little investment as possible. People should start investing at a little age so as to ripe their benefits in the future. Here is a simple real-life example to explain how compound interest on investment actually works.

Imagine a snowball as it rolls down the hill, hardens, keeps adding size, and picks up pace.  By the time it reaches the bottom of the hill we find that it has transformed into a huge, hard snowball with incredible speed.

The maximum growth happens when its closer to the bottom of the hill. Compounding of money works in a similar way.

When you put the principle to work, it fetches interest. When this interest is added to the principal, from that moment on, the entire sum of principal and interest earns you the interest. This way till when you will get old you will be able to make lots of investment.

It can be represented by the formula

Compound Interest= Principal (1+ Rate)^Number of years Or

CI=P(1+R)^N

Now money can be invested in various places like fixed deposits or kept with the bank or in mutual funds, shares of companies, etc. Most people either don’t have full knowledge or some listen blindly only to what others say so this has made investment in mutual fund and shares very less. But the reality is totally different.

Though it is being said that mutual funds are subject to market risk but the returns it gives in the future is very tremendous. The same is the case with shares they give huge returns in the future but people fear to invest in it because they hear from others that “Paisa doob gaya”. Yes, it is true that the share market can be down due to various reasons for example recently due to the COVID-19 share market totally crashed. But if we invest money for a longer time period we get huge returns in the future.

As per the latest findings, for example, If Mr. A has invested x amount of money 36 years ago so today his returns will be as follows-

Fixed Deposit-18x

Gold- 34x

Silver-25x

Sensex-280x

This means if one wants to earn higher returns he/she will have to take some risk and can earn huge returns in the future by investing money in Sensex or nifty or mutual funds.

To gain this proper financial knowledge it is very much important to invest money in the right place. In mutual funds, one needs to invest its money in the fund and the asset management company who operates it will further invest money in different various sectors so that there will be gain in a few sectors and loss in a few. At the same time, all sectors can not suffer a loss so the mutual fund is the safest place to invest money, and also it gives a high rate of return.

Rules of Getting High Returns

There are three main rules of investment to get high returns in future-

  • Right Idea
  • Right Time
  • Stay invested for long

2 Pillars of Long Term Investment

Decision Quality

The power of compounding requires well-researched decisions. All the research needs to de done and financial knowledge should be gained about investment so that investors invest their money in the right place.

Time

Time is a critical variable that ensures that the decision taken by us as an investor works for us or not.

So we can say that people should start the practice of investing money at a younger age and not wait for the later years to save money. Investing money also minimizes the impact of taxes in the long run. When people will start investing money at a younger age it will give them huge returns in the future and the person who invests in later years even if he invests more amount he will not be able to get that much return. At last to sum it up well one quote of Professor Albert Einstein fits well- The most powerful force in this Universe is Compound Interest.

Faiz & Mohtasham

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