What is the power of compounding interest?

by Vinay Kumar Brighter Mind Equity Advisor

The power of compounding represents the early you start to invest the longer term for you gain and create huge wealth creation. In finance power of compounding can generate a high return over a period of time and the interest and the same interest are added back to the principal amount.

The process of compounding interest runs till you take out all your money from your investment. SEBI registered investment advisor from which investors can suggestion about the tools which can give them good compounding interest.  

 

What determines how much compound interest you can earn?

 

Several factors can influence the rate at which your money compound: -

 

1. The rate of return on your investment: - This shows how much return you will get on your return in the form of a dividend. There are dividend-paying stocks in which you can invest and gain regular income or return on investment.  
2. Time: - The more time you give your investment the more it gets compounded and gains capital appreciation. For example, if you invested your money for 10 yrs it would grow more as compared to invested money for 5 yrs. More the time the more you get to benefit from your investment.  
3. The tax rate: - You will end up having more money if you don’t have to pay taxes at all on your returns at the end of each year. This is the reason why some of the tax-saving schemes and investments are necessary to save tax on your returns.   

 

 

Compounding interest and time value of money

 

The time value of money gives you the value of today’s money in the future due to compounding interest. The time value of money is the state of compounding interest which states the value of money changes depending upon when it’s going to receive. The term “opportunity cost” comes under this which means if you don’t invest your money at right time and in the right instrument you will lose the capital gain on that, you can also say you do not get in interest if you don’t invest in the money in the right time.

 

Compounding interest gives you benefits if you stay invested for a longer duration. There are several SEBI registered investment advisor who guides what tools or instrument are best as a prospect of better compounding interest. The time value of money can take patience until you see a compounding effect on your investment.

 

 

How do you calculate compound interest?

 

There are various calculators available that make compounding calculations easy with easy features. But if you go for manual calculation there is a formula that you will have to follow. The formula is like multiplying your annual interest rate with your principle value and then adding the value to the principle value and now it became a new principal value. Now again repeat the process until you want to take out all of your investment.

 

 

Can the power of compounding interest make you rich?

 

Yes, compound interest may make you rich if you start investing in the early stage of life. Compounding interest is the most powerful force which can create your wealth for a longer duration period. We can see various examples of using this compounding interest by retailers, businesses man, lenders, etc., and saw them getting rich for themselves and their generations. The most investor doesn’t believe these facts until they see calculations and results in front of them.

 

It is likely for many investors that are investing in those tools which can give high compounding interest and generate wealth over a long period of time. You can invest either in the mutual fund or directly in equity which has the most possibility to make you rich if you wait patiently for a longer duration.

 

Conclusion: - Power of compounding gives immense benefits to any investor if invested in the right tools and at right time. It grows your investment with huge returns over a period of time. Most of the affects you get to know while investing equity market through a mutual fund. This is manageable by experts in the market which we call fund managers. Several advisories suggest where to invest with higher growth of return but one of the advisory names SEBI registered stock advisory company who have 20% CAGR history. 

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Created on Sep 5th 2022 00:59. Viewed 169 times.

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