Touted as the eighth wonder of the world by the famous physicist, Albert Einstein – compounding of interest has been instrumental in generating wealth for many investors. The concept is simple yet effective – the interest earned on your principal investment is added back to the capital leading to an increasing rate of growth of your funds.
For example, if you invest ₹100,000 for 1 year at 10% p.a. with quarterly interest payment, then you would earn ₹10,000 as interest at the end of the year.
However, if you were to reinvest the interest, then the compound interest earned after one year would be ₹10,381. This difference looks marginal since the tenure is just one year.
If you keep reinvesting for 20 years without adding any more capital, then the compound interest earned would be ₹620,957 as against ₹200,000 which you would have earned if the interest was not reinvested.
So, by investing ₹100,000 once and not withdrawing the principal or interest, you can generate wealth by compounding your returns over and over again. The important element to remember is that compounding shows exponential effects as the tenure increases. Hence, it is important that investors, with an objective of a retirement corps, start saving early and make their money work harder for them.