Power of compounding

One a great man said the power of compounding is eighth wonder of this world.Can you believe the money has the power to generate more money, this power is known as the power of compounding.

Power of compounding is believed to be the eight wonder of the world. One can utilize the power of compounding by many ways. In this post I would like to share how does I utilize this power in my investments to get the good rate of return

But before that I would like to explain the term "Compounding" : - In order to explain the term I would like to give a example , say I have 100rs and deposit that in bank , the bank gives me 4 percent rate of interest on the amount , at the end of the year I will have 104rs as my money , on the next year I will get 4 percent return on the 104 amount.

So from the example above the power of compounding simply means getting the interest on interest plus principle amount.

Higher the amount interest will keep on getting higher as the compounding is giving interest for interest as well. There are many ways to utilize this power and earn returns. These returns can be used for the monthly income as well , or at least I would say I prefer to have a income from this interest amount.

I prefer to have fixed deposits , PPF , insurances , SIP in mutual funds in order to utilize the power of compounding.

In PPF the rate of interest is high from normal saving and fixed deposit and hence it is one of my favorite type of investment, but the money gets locked for a period of minimum 10 years in it, this way the compounding will work in much favorable amount as each year the interest earned will be more than the previous year and the total maturity amount will be very good.

In PPF one can deposit a minimum of 500 rs to a maximum of the 1,50,000 (One Lakh and fifty thousand) Rs. It is most promising investment as it is from the Govt. of India. 

Other than PPF , I prefer to have the fixed deposits :- I invest in the fixed deposits because they are liquid and provide good secure rate of interest. I like to create the FD's and then keep the monthly payout of the FD's to earn a regular income from it. I invest my earned money into the FD's and try to use the earned interest for my expenses. This way my expense money is increasing month by month and my principle amount is safe and secure. Wherever I have a plan to buy something of a big amount, either I wait for it to mature or I simply break a FD.

Liquid Funds:- One of my other favorite is liquid fund, these funds may be good way to use your power of compounding. I try to park my extra money in them as well because they too provide good rate of return than saving account. As there is no lock in period one can always take out the cash where ever he requires it , In order to earn a regular income from it one may choose for the systematic withdrawal plan as well.

SIP in other different types of fund :- I have started a SIP in the balance and an debt fund , this way each month some of my money goes into the mutual fund and I earn a return from it. The value of the unit increases and decreases each day and as a result for the month SIP , if the unit decreases I gets little more unit for the same price and if the unit price increases I gets little less of the units for the same as price and as a result I gets the better overall average price.

There are many other ways which can be used to utilize this power of compounding like insurence : - Insurence is not a investment but can be treated like a investment. The amount paid in the form of premiums get the good rate of return and you get dual benefit from it , one in the form of insurence , other in the form of return. In order to secure the financial future of the loved ones one should have atleast 2 types of insurences, 1 term and 2. purpose based.

Term insurence do not give any return.

But the If you have planned something financially you can start a policy for the same for the period duration , this way you will pay the premium each year and if you survive you will get the matured amount and if you do not your loved ones will get that amount.

I have life insurence and term insurence to make my family financially successful ever if I am not with them and I believe everyone should consider the insurances while financial planning.

Well , this is all for this post , In the next post I would love to share about the various ways to invest the money for the working professionals and how I make my investments.

Till then stay tuned.