Do you know what exactly your investment grows over time with compounding? What is compounding that is pretty much the buzz word at every other investment workshop?
If you are new to the concept of compounding, there is a chance you may have never heard of compound interest, in contrast to simple interest.
Let's take an example. Let's say you invest Rs 1,000 in a scheme that pays an interest rate of 10% per annum compounded quarterly. How much interest will you have at the end of the 1-year period?
No, that would be simple interest. In our example, at the end of the first quarter, your principal of Rs 1,000 would have earned Rs 25 interest.
At the end of the first quarter, your principal amount will be Rs 1,025 (including interest), not Rs 1,000.
So at the end of the second quarter, your Rs 1,025 would have earned another Rs 25.6 interest, taking your investment to Rs 1,050.6 (principal plus interest).
At the end of the third quarter, the accumulated principal of Rs 1,050.6 will earn interest of Rs 26.3 at the end of the third quarter, taking your overall investment (principal plus interest) to Rs 1,076.9.
It will be Rs 1,103.8 (Rs 1,076.9 plus Rs 26.9).
Understanding the difference between compound and simple interest is crucial for making informed financial decisions. Compound interest boosts returns, helping wealth grow faster. Grasping compound interest empowers smart financial choices, potentially leading to greater financial stability and success.