All of us have learnt the concept of compound interest in school. Most of us forgot about it as soon as mathematics became an optional subject! But unlike a lot of what we learn in school grade math (think quadratic equations), this is one concept that can have enormous influence on our lives.
Here is a short story that demonstrates this. One of the Founding Fathers of USA, Benjamin Franklin, who died in the year 1790 bequeathed a sum of around $8,800 to two cities that he had lived and worked in – Boston and Philadelphia. His will, however, came with a caveat. These amounts were to be invested by the cities for 200 years, after which they were to be used for public work. And by the year 1990, at the end of the 200-year period, this $8,800 had been transformed into over $6.5 million. And that’s what we call the power of compounding.
Compounding, in financial terms, refers to letting your money make more money, by earning a return on top of an earlier return. The most critical aspect of this equation is time. The longer the time period involved, the greater is the impact of compounding – as can be seen from what happened to Franklin’s bequeaths.
But since no one lives for 200 years, let’s look at a more realistic example when it comes to personal finances. Let’s say you get your first job at the age of 25 and your take-home salary is Rs. 20,000. Now assume you start saving and investing Rs. 5,000 every month or Rs.60, 000 per year and you continue this routine till you retire at the age of 60. The principal amount you would have put aside during this duration would be Rs. 21 lakh (Rs. 60,000 x 35 years).
Now, if your investment earns an annual compounded return of 10% per annum – not an unlikely figure for an economy that is expected to grow at 6-8% for the foreseeable future – your principal of Rs. 21 lakh would have been transformed into Rs. 1.91 crores.
And here is how the time factor, as mentioned earlier, plays a role. If the tenure of the investment was 30 years (instead of 35 in the earlier illustration), your corpus would be only Rs. 1.13 crores. If you reduce the tenure to 25 years, the corpus gets reduced to just Rs. 66 lakh. So, it makes sense to start saving and investing as early as possible.
The next question faced by most people is where to invest and how to do it. There are after all multiple options available today. You could have fixed or recurring deposits in banks, buy real estate, invest in mutual funds, buy Unit Linked Insurance Plans (ULIPs) from insurance companies or invest directly in the stock markets.
To help you through this maze, you can turn to India’s No.1 bank – HDFC Bank.
The Investment Services Account (ISA) from HDFC Bank allows you to take charge and manage your Mutual fund investments* from anywhere in the world. With an ISA, you can make fresh MF purchases, buy additional units in schemes you have already invested in, switch between schemes, start a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP), track performance of your investments and even redeem your holdings when needed.
All of these features help you stay ahead of the market and make informed investment decisions so that your money can make money.
This together with Fixed/Recurring Deposits, as well as Insurance policies, are available through HDFC Bank NetBanking and MobileBanking for your convenience.
Don’t waste any more time. Go to www.hdfcbank.com or visit your nearest HDFC Bank branch today. Remember every day’s delay is one day less for the Power of Compounding to work its magic!
This is a Partnered Post.
*Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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Updated Date: Mar 29, 2018 11:44:21 IST