Compound interest is the interest you earned on interest. Compound interest helps you to increase your wealth tremendously over time. The best part is that you can start your investment with a smaller amount and still reap the benefits of compounding. Time plays a vital role in reaping the benefits of compound interest because the longer the investment horizon, the more interest you are going to earn on your investment. In this article, we are going to learn about what compound interest is and how to use compound interest calculators for mutual funds.
What is compound interest?
The fundamentals of compound interest are that your investment is growing by a certain rate of interest but the biggest difference is that the growth rate is established at a new base. For example, if you have started your investment with Rs. 1000 while the growth rate is 10% per year. So, at the end of the year, your investment of Rs. 1000 will grow by Rs. 1100. Now, in the next year when you get another growth of 10%, that will be on the new base of Rs. 1100 rather than Rs. 1000. So, you will be receiving 10% on Rs. 1100 which is Rs. 1,210.
How to use a compound interest calculator for mutual funds and other investments?
There are various sites available on the internet that allow you to calculate compound interest. To calculate the compound interest you need to enter how much money you want to invest and choose whether your investment will be done on a monthly or annual basis. Then you need to choose how many years you will invest and stay invested and choose the rate of interest. After putting in all the information, you will see how much money you can earn after the end of the tenure. For example, you have invested a lump sum amount of INR 5,00,000 now and your investment grows by 12% every year for 10 years. After 10 years, your investment of INR 5 lakhs will grow to INR 15.53 lakhs. If you start a SIP (systematic investment plan) of Rs. 10,000 per month and continue for 10 years, your investment of Rs. 12 lakhs will grow by Rs. 23.23 lakhs at the end of ten years. So, this is the power of compounding.
To conclude, investing in mutual funds is the best way to start your investment journey and one can reap the best benefits of mutual funds by staying invested for a long-term horizon. Various websites allow you to calculate compound interest online and help you to make informed investment decisions. To reap the best benefits, start investing early and hold your investment for the long term.
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