Miracle of Compounding

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Compounding usually refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest. A compound interest mechanism is applicable on both assets and liabilities. While compounding enhances the value of an asset more rapidly, it can also increase the amount of money owed on a loan, as interest accumulates on the unpaid principal and previous interest charges. Hence, the compounding effect increases the amount invested or loaned.

The effects of compounding strengthen as the frequency of compounding increases. Assume a one-year time period. The more compounding periods throughout this one year, the higher the future value of the investment, so naturally, two compounding periods per year are better than one, and four compounding periods per year are better than two.

Compounding is very crucial in order to know how much growth our investment can achieve in how many years. More concretely, all investors always have liked to know when the money will be double. A simple chart explains how much time will it take if we get the following growth rate:

Let’s understand the effect of compounding with the following example:

If without compound interest, your total investment of Rs. 5 lakh would earn Rs. 50,000 only at 10% interest. The difference made by compounding is worth Rs 1,71,561 in the above example. That is almost 3.43 times more than what you would have earned without compounded interest.

There are 3 simple key rules to make you rich with the help of compounding:

  1. Disciplined Investment
  2. Early start always wins
  3. Be patient with the ups and downs of the market

To know more about how to meet your financial goals, contact Aegis Financial!!

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