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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
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Ref. No. KLI/22-23/E-BB/492
Compound interest is an interest calculated on the principal and the existing interest together over a given period.
You must have come across this question at least once in your life- what is compound interest? Compound interest is one of the methods of calculating interest on your invested/ deposited money. It adds the interest earned in first cycle to the principal amount of next cycle, which means you are automatically investing and earning interest on previous cycle’s interest as well. By reinvesting your interest, your money grows exponentially over time. Whether saving for the future or investing for a return, understanding compound interest is key to financial success.
Let us explore what is the meaning of compound interest, and how to calculate compound interest.
Compound interest is the interest earned on the initial principal amount and the accumulated interest from previous periods. Or, to put it another way, it’s interest on interest. Unlike simple interest, which only accrues on the principal amount, compound interest allows for the exponential growth of your savings or long term investments.
Calculating compound interest can be a bit complex. The formula for calculating compound interest is:
A = P(1 + r/n)^(nt)
Where,
A represents the total sum, including interest.
P equals the principal sum
r equals the annual interest rate (as a decimal)
n is the number of compounding periods per year.
t is the duration in years.
Let’s say you invest ₹10,000 in an account that earns 5% compound interest annually. After one year, you would earn ₹500 in interest, bringing your total balance to ₹10,500.
In the second year, you would earn interest not only on the ₹10,000 principal but also on the ₹500 of interest earned in the first year. This would result in a total balance of ₹11,025 at the end of the second year, and the interest earned in the third year would be based on this higher balance. Over time, this compounding effect can result in significant growth of your savings or investments.
Compound interest is essential because it allows your savings or investments to grow faster than they would with simple interest. You can take advantage of the compounding effect by reinvesting your earned interest, resulting in significant growth over time.
Compound interest can be a powerful financial tool, but like two sides of a coin, it has some pros as well as cons. Let us take a look:
Let us consider two investment plans - Plan A and Plan B, with different interest rates and compounding frequencies.
Assuming an initial investment of ₹10,000 in both plans, let’s calculate the returns over ten years.
Although Plan A offers a higher interest rate, Plan B’s more frequent compounding frequency results in higher returns over ten years.
Similarly, you can use the concept of compound interest to compare other investment plans, such as fixed deposits, mutual funds, and stocks. Comparing returns based on the same compounding frequency is essential to getting a fair idea of the returns on investment.
Compound interest is one of the most powerful tools available to anyone who wants to create wealth and achieve financial freedom. Here are some ways to use compound interest for financial planning.
The earlier you begin saving, the more time your funds have to grow. This is why it’s important to start saving as soon as possible, even if it’s just a small amount. If you can start saving in your 20s, you will have decades to benefit from compound interest.
Tax-deferred accounts allow you to save taxes on your contributions and earnings until you withdraw the money in retirement. This means that your money can grow faster because you don’t have to pay taxes on your earnings each year. Take advantage of these accounts and contribute as much as you can each year.
By starting early and reinvesting your earnings, you can watch your wealth grow exponentially over time. Whether you’re saving for a big goal or planning for retirement, compound interest can be your best ally in achieving financial success. So, take charge of your investments, calculate the potential gains with a compound interest calculator, and let the magic of compounding boost your financial journey!.
1
More frequent compounding results in more interest earned, as interest is calculated and added to the principal more often.
2
Annual compounding adds interest once yearly, semi-annually twice, four times quarterly, and twelve times monthly, increasing overall interest earned.
3
Suppose, the principle= ₹1000, Interest rate=5%, compounded quarterly, time period= 3 years
Compound interest= A = P(1 + r/n)^(nt)
=₹1,126.83
4
Long-term investments benefit from compound interest because it increase returns exponentially over time, maximizing growth.
5
Compound interest on loans and mortgages raises the total repayment amount over time, requiring the borrower to repay as soon as possible.
6
Starting investing early allows you to maximize the benefits of compounding interest. The sooner you start, the more money you can make.
7
Continuous compounding calculates interest over an infinite number of periods, whereas regular compounding calculates interest over fixed periods such as monthly, quarterly, and so on.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
