the power of compound interest and long-term investing
Goal: Understand how compound interest works and why starting early is critical, using relatable Indian scenarios.
Compound Interest works through this mathematical principle but also requires early investment to produce results. Our goal is to explain the rules of compound interest and show that beginning earlier is essential through specific examples.
The-Power-of-Compound-Interest.pdf
Key Concepts 1. What is Compound Interest?
You earn profits from both your original investment and all interest you have received before.
Real-Life Examples
Example 1: PPF (Public Provident Fund)
You put ₹1,00,000 into a PPF saving account earning 7.1% yearly interest which gets updated once per year.
Calculation: After 15 years: ₹1,00,000 → ₹2.8 lakhs (tax-free!). The government’s backing of PPF provides a safe platform to earn effective long-term compounded returns.
Example 2: Equity Mutual Funds (SIP)
At age 25 you begin putting ₹5000 each month into an equity mutual fund. Returns from equity stands at 12 percent as demonstrated by Indian market data. The plan needs 25 years from age 25 to reach 50.
Calculation: The total money invested over this period amounts to ₹15 lakhs spread across 300 payments of ₹5000. By putting ₹5,000 into the Groww SIP Calculator every month will grow to ₹1.07 crores. Investing small sums regularly in a long period of time creates huge value over several decades.
Example 3: Fixed Deposit (FD) vs. Inflation
Keep ₹10 lakhs in an FD with 6% annual interest for 20 years. During the 20 years the fixed deposit earned ₹10 lakhs but changed to ₹32.07 lakhs through annual compounding. After 20 years your India fixed deposit of ₹10 lakhs will grow to ₹32.07 lakhs but will lose its buying power because of 5% inflation resulting in ₹12.06 lakhs value. Fixed Deposits help protect your money but generally underperform the inflation rate. For long-term growth interests either stocks or PPF offer better returns than bank fixed deposits.
Rule of 72
Determine the timeframe to double your funds through this calculation.
You need 10.1 years to double your money at the PPF rate of 7.1%. At a 12% returns your Equity Mutual Fund needs six years before doubling your investment.
Tasks for Day 3
- Calculate Your Own Scenario: Explore the Compound Interest Calculator on ET Money platform. Determine how ₹10,000 invested each month over 20 years at 12% returns will grow.
- View the “Power of Compounding” video by Ankur Warikoo
- Action Item: Sign up for PPF banking services from any bank or start investing with a minimum monthly deposit of ₹500 through mutual funds on Groww / motilal Oswal / Angelone or Coin by Zerodha.
Key Takeaway for Indian Investors
People who begin to invest at age 25 with ₹5000 per month will achieve more than double the retirement wealth of individuals who start at age 35. Buying stocks trading property or putting money into PPF helps combat inflation through capital growth. Your PPF funds and ELSS tax-saving mutual funds grow faster than other financial products because of tax free income and compounding returns.
Common Indian Investor Questions
Q-: “Is PPF safe?”
Yes! The Indian government supports this product that includes EEE tax treatments. Is it possible to withdraw money from PPF before completing 15 years of contribution. The invested funds remain available after the 6-year mark but come with an interest deduction.
Q-: “Are mutual funds risky?”
Over extended periods funds that invest in equities exhibit better performance than fixed deposits and exceed inflationary rates.
PS : If you want to start your financial journey , check the link in the profile section ( Himanshu Rajbhar) to book a 1 : 1 session with me