You may have heard about the power of compounding from many financial experts. But have you ever attempted to delve deeply into the concept to comprehend how it works? Perhaps not. It is only compounding that aids in rapidly multiplying your investment and assisting you in accumulating wealth that you can use during your retirement years, home purchase, or meeting other major financial goals.
The following article will explain the power of compounding in detail to assist you with your financial planning.
Compound interest is the concept used when you take out a loan or invest in a scheme. Instead of calculating interest on the initial principal, this method computes interest on the initial principal plus interest accumulated each year. In the context of investment, it helps you to accumulate wealth at a much faster rate when compared to a simple interest rate.
Compounding is calculated by multiplying your investment's initial value by one plus the yearly rate of interest to the total number of compounding years minus one. The initial investment amount will then be deducted from the output received from the previous calculation. Here is the formula to calculate the compound interest –
P [(1 + i) n – 1]
Here,
'P' stands for initial investment value
'i' stands for interest rate
'n' means the number of compounding years
Let's look at an example to help you understand the concept more easily.
Assume you invest ₹2 lakh each year for five years in an investment scheme that offers an annual compound interest of 5%. After five years, your ₹10 lakh investment will be worth ₹11,60,383. This means your profit will be ₹1,60,383. Similarly, if you invest the same amount in the same pattern but in a scheme offering a 5% return at a simple interest rate, your investment value is ₹11,50,000.
The rate at which compound interest contributes to wealth generation is determined by multiple factors that are discussed in the next section.
Three key factors determine how your money will multiply through compounding.
There is no exact answer to this, and it all depends on your future goals and budget. As previously stated, the longer you invest, the more wealth you will amass over time. If you invest in a scheme such as mutual funds, the power of compounding is determined by how frequently you withdraw the profit. For example, if you make a ten-year investment but withdraw the profit every year, the compounding effect will not be visible in your returns.
The following table explains the significance of tenure in compounding.
| Investment year | Opening balance | Investment | Returns (at 10% interest rate) |
|---|---|---|---|
| 1st year | – | ₹2,00,000 | ₹20,000 |
| 2nd year | ₹2,20,000 | ₹2,00,000 | ₹ 42,000 |
| 3rd year | ₹4,42,000 | ₹2,00,000 | ₹64,200 |
| 4th year | ₹7,06,200 | ₹2,00,000 | ₹90,620 |
| 5th year | ₹9,96,820 | ₹2,00,000 | ₹1,19,682 |
The above table clearly states how your investment grows with each passing year.
A compound interest calculator is an online tool whose functionality is based on the previously mentioned mathematical formula. To use a compounding interest calculator, you will need three variables – principal investment value, investment tenure, and rate of return. The calculator will show you the potential return over the specified period.
The monthly compound interest calculator has numerous features and can be useful in various situations. These are
Compounding offers great benefits. If you invest your savings wisely, it can help you maximise your profits quickly. In order to make the most of it, try to begin your investment journey at a young age and maintain patience rather than being concerned with short-term market fluctuations.
To know more, please read the relevant articles at our website PNB MetLife.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
PNB MetLife India Insurance Company Limited
Registered office address: Unit No. 701, 702 & 703, 7th Floor, West Wing, Raheja Towers, 26/27 M G Road, Bangalore -560001, Karnataka
IRDAI Registration number 117 | CIN U66010KA2001PLC028883
Terms & condition apply, Benefits stipulated are subject to premiums paid and policies in-force. For more details on risk factors, please read the sales brochure and the terms and conditions of the policy, carefully before concluding the sale. Tax benefits are as per the Income Tax Act, 1961, & are subject to amendments made thereto from time to time. Please consult your tax consultant for more details.
Goods and Services Tax (GST) shall be levied as per prevailing tax laws which are subject to change from time to time.
The marks "PNB" and "MetLife" are registered trademarks of Punjab National Bank and Metropolitan Life Insurance Company, respectively. PNB MetLife India Insurance Company Limited is a licensed user of these marks.
Call us Toll-free at 1-800-425-6969, Phone: 080-66006969, Website: www.pnbmetlife.com, Email: indiaservice@pnbmetlife.co.in or Write to us: 1st Floor, Techniplex -1, Techniplex Complex, Off Veer Savarkar Flyover, Goregaon (West), Mumbai – 400062, Maharashtra. Phone: +91-22-41790000, Fax: +91-22-41790203.
| Beware of Spurious Phone Calls and Fictitious / Fraudulent Offers! IRDAI is not involved in activities like selling insurance policies, announcing bonus or investments of premium. Public receiving such phone calls are requested to lodge a police complaint. |
AD-F/2022-23/431
Bonus declared for Participating Policies in FY’23
transactions completed on the khUshi chatbot.
Claim settlement ratio for retail business
Locations & strong branch network
As your trusted life insurance partner, PNB MetLife is with you amidst the current COVID-19 outbreak. Our policies also cover COVID-19 Claims. In case of a Death Claim, kindly submit the signed Claim Intimation Letter mentioning the policy number, brief of the insured event and other claim documents on the email mentioned herewith. Please write-in to us at claimshelpdesk@pnbmetlife.com or indiaservice@pnbmetlife.co.in. You can also call us on 1800-425-6969 for death claims intimations and for any queries on Monday - Saturday between 10:00 am - 7:00 pm.
PNB MetLife Insurance, amongst the trusted Life Insurance companies in India, aims to provide a wide range of Life Insurance products that suits the needs of an individual at every stage of his life. Life Insurance Plans range from Term Life Insurance Plans, Term Plan, Protection Plans, Long Term Savings Plans , Retirement Plans & Child Education Plan.
Get a Callback
Ask khUshi
Hi! I’m khUshi. How can I help you?
