The Power of Compound Interest in Growing Your Retirement Funds.

Having good retirement funds is very necessary to make post-retirement life peaceful and comfortable. There are many investment options where you can invest a part of your earnings for retirement. After retirement, these funds offer a regular source of income. This is the main objective of this type of fund.

The power of compound interest.

The power of compounding means growing wealth speedily. Under this compounding process of earning profits, the interest is added to the principal amount before reinvesting the funds. It means giving interest on interest. In this process, when you invest some amount in any scheme, you get the interest. At the same time, you get the interest on interest, as the given interest is added to the principal amount and the next interest is calculated on the principal amount plus the last interest given.

The most important thing about compounding power is that your investments gain interest on the initial capital as well as on the interest that has already been earned. Thus, with the power of compounding, you are able to have a solid foundation, which increases with each gain. As an investor, you should keep yourself away from taking out your returns until the investment period ends. The power of compounding lies in reinvesting profits from your investment. Otherwise, you will not avail the possible profit of compounding on your earnings. Choosing the right investment scheme and duration should be according to your financial objectives and your ability to contribute.

Role of compound interest in growing retirement funds.

Compound interest plays a big role in increasing your profit and returns as it gains interest from both the principal amount and the interest earned on your deposited funds. You gain the interest on the interest of your deposited funds. In some schemes, it is calculated annually, but sometimes it can be on a monthly, daily or quarterly basis. The sooner you begin investing your money, the more returns you gain. There are two types of investment options for compound interest:

1. Assertive Compound Interest Investments: This is the first type of compound interest investment strategy having an aggressive approach. It can give high returns as your profits. But there are some risk factors involved in it. The stability and growth are not assured. But the strong growth in profit tempts one to take risks.

 2. Secure Compound Interest Investments: This type of compound interest investment is the secure one, which provides a greater level of safety along with reliable returns. So, you can depend upon these secure compound interest options. This kind of investment can be ideal for conservative investors who want secure and consistent returns from the top compound interest options.

Top Investment Choices with Compound Interest.

When you want to invest in any scheme offering compound interest for retirement funds, it is important to have good knowledge of the available investment schemes which are safe for making investments. These schemes are:

Public Provident Fund (PPF): PPF is the most liked long-term investment option. It is a secure investment, as it is supported by the government. This option is favoured by investors not only because it is a low-risk investment but also it has the power of compound interest. In PPF, compounding of interest is done on an annual basis. It is a long-term investment option having a 15-year lock-in period.

Fixed Deposits: Fixed Deposits in banks are traditional investment option which is one of the best compound interest investments with no risk. In fixed deposits, you have to invest your money for a specific period with the bank, where the interest rate remains constant as it does not change with the fluctuations of the market. The interest rates may differ on the basis of the term length.

Life Insurance Plans: The Life Insurance Policy serves the double purpose of life: first is saving money to collect funds for your future, and second is providing financial protection for your family in case of your untimely death. The only condition of LIC is to make the premium payments on time, whether monthly, annually, or quarterly. The returns are assured but vary based on the selected plan and the insurer. There are some of the financial products of LIC which provide compound interest and become helpful in accumulating good funds for after retirement life.

National Savings Certificate: There is one more government-supported plan, which is the National Savings Certificate. If you are seeking top compound interest investments, this is one of them. NSC is issued by selected banks and post offices. This is a traditional and the most favourite option for many people due to its benefits of income tax exemption, safety of funds and annually compounding of interest.

Mutual Funds: In Mutual Funds, your invested money is managed by fund managers. They invest your Funds in the Equity Market. You can also invest in Debt Mutual Funds through mutual fund companies or Registered Investment Advisors (RIAs). The risk associated with debt funds is considerably lower than that of equity. In return, the investors are issued debentures and bonds issued by corporations and governments. They make debt funds an ideal choice for investors, providing moderate returns with minimal risk. Your returns are reinvested and provide the benefit of compound interest.

Unit Linked Insurance Plans (ULIPs) as Debt Fund Investment: The ULIP insurance and investment plan provides growth of funds and insurance. It gives you the option to go for debt funds as an investment option. In ULIPs, debt funds are generally considered less risky than those who invest in equity funds.

Equity-Linked Savings Scheme (ELSS): There is another kind of mutual fund where you can invest your funds for getting the benefit of compound interest; that is ELSS. In this plan, your funds are allocated in stocks and the equity market. You can choose to invest in ELSS either as a lump sum or via SIP mode. In ELSS, there is a lock-in period of three years, after which you can redeem your funds or reinvest the funds with compound interest.

National Pension Plan (NPP): NPS (National Pension System) is a pension and retirement savings plan, specifically designed to provide investors a regular income after their retirement. By making regular investments in NPS through different options, you can build a solid fund for your retirement. In this scheme, you get the return with compound interest. The risk factor can be minimised in NPS by diversifying your funds into bonds and stocks.

Main Features of Compound Interest Investment Schemes.

The main characteristics of compound interest investment schemes are listed below:

• Reinvestment of interest: There are many investment options with compound interest as they reinvest the given interest earned. This cumulative earnings can be helpful in increasing your investment over the long term.
• Increased profits: The reinvestment of interest availed is like compounding which gives better returns as compared to simple interest investments.
• Long-term Investment: The maximum benefit can be availed in compound interest investment schemes when the goal is set for a long duration, like 20 or 30 years.
• Investment Amount Flexibility: The options for investments offering compound interest provide flexibility in the amount invested. Due to this flexibility, there is a good increase in the retail investors.
• Tax Advantages: There are many investment schemes which offer compound interest and also provide income tax rebates. Thus, the total tax burden for investors reduces.
• Professional guidance: The compound interest investment schemes as mutual funds, provide expert guidance to assist investors in growing their wealth.
• Liquidity: Some of the compound interest investment schemes provide the facility of liquidity, as they allow investors for early withdrawals and loans.

Benefits of Compound Interest Investments.

The main benefits of investing in the schemes providing compound interest are:

• Profit Multiplication: With compounding of your invested funds, the profit and returns increase with time.
• Low Initial Investment: Those investment options which provide compound interest can be initiated with a small amount. It makes them reachable for a majority of investors.
• Diversification: Most of the schemes for compound interest investments also offer diversification opportunities in your portfolio which includes stocks, bonds, insurance, etc.
• Regular wealth growth: Compound interest investments can increase returns significantly if invested for long durations. The investors become able to create a good sum of money over the long term.
• Tax Benefits: ELSS and PPF are compound interest investments that provide income tax benefits. These schemes reduce the overall tax burden for investors.

Disadvantages of investments with compound interest.

In spite of having so many advantages, there are also some disadvantages of investments that give return with compound interest. These disadvantages are listed below:

• Market Volatility Risk: This is the major risk involved in compound interest investments. The schemes which give compound interest are affected by market-related fluctuations.
• Inflation Risk: Inflation can deteriorate your purchasing power, as the value of your returns availed with compound interest might not match with inflation.
• Not suitable for short-term investors: The investments with compound interest are beneficial for long-term investors. These investments are not suitable for short-term investors.
• Risk of Monetary Loss: The investors who are not properly cautious in their investment selections may face monetary loss due to the compounding interest effect.

Wrapping up.

Compound interest serves as an excellent method of generating income by making investments in bank FDs, ELSS, and PPF. All these options provide great returns if invested for a long period. These investment options provide good returns, and by investing in these options, you can also avail the income tax advantages. But at the same time, you should be careful about the risk involved in such investments as liquidity risk, inflation risk, and market risk. You should study the market trends before making any investment.

FAQs.