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The Magic Of Compound Interest! Learn how even a small investment will turn into lakhs

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new Delhi. The eyes of those who invest and save are always on the return, which is determined by the rate of interest you get on your investment. Another factor works in this is Compound Interest, which gives further interest on your returns.

If you understand the formula of Compound Interest better then you can get manifold returns on your money. Through this, you will create a fund of lakhs in the long run even with small savings. If there is a difference of even 1 percent in the interest rate on an investment, then there will be a difference of lakhs on its corpus through compound interest.

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What is Power of Compounding?
Understand it in simple words that the return you have got on your investment, then investing it again is called compounding. In this, you are given interest again on the interest received along with the principal amount. Compound interest is given on most of the mutual funds, due to which their returns increase significantly. For example, if you are getting 10 percent interest on Rs 2 lakh, then after a year it will be 2.20 lakh, while 10 percent interest after that under compound interest will be available on Rs 2.20 lakh. Interest will continue to accrue in this manner till your withdrawal and the corpus will get bigger.

Understand the Mathematics of Compound Interest like this
If you start an SIP of 10 thousand rupees a month and get an interest of 8 percent annually on it, then in 10 years your total investment amount will be 12 lakh rupees. On maturity, you will get a return of 18.42 lakhs i.e. your earning as interest will be Rs 6.42 lakhs.

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If the interest is 2% and the time is increased by 5 years, then…
You should limit the amount of your investment to 10 thousand rupees, but if you are getting 2 percent more interest on investment i.e. 10 percent annually and the time also increased by 5 years to 15 years. In this case, your total investment will be Rs 18 lakh, while on maturity you will get Rs 41.79 lakh. You have seen that due to the difference in interest of just 2 per cent and extending the tenure by 5 years, the same investment yielded a higher return of Rs 23.79 lakh.

If the interest is reduced by 1% and the period is 20 years, then…
If you invest 10 thousand every month, then in 20 years there will be a total investment of 24 lakhs. If compound interest is available on this at the rate of 9 percent, then the total return on maturity will be Rs 67.29 lakh. That is, on increasing the time, you got more profit than expected and Rs 43.29 lakh came as interest.

Tags:, Investment and return

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