In ULIPs, the investment risk in the investment portfolio is borne by the policyholderU
The Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Linked Insurance Products completely or partially till the end of the fifth year
The power of compounding has been called the eighth wonder of the world. This principle can help you transform your investments and reach your goals sooner. Let’s find out more about it and the investments that offer compound interest.
Compound interest is the interest you earn not only on your initial principal amount but also on the interest it has already accumulated. For example, if you invest ₹ 5,000 in a fund with an interest rate of 10% per annum, your investment will grow to ₹ 5,500 after the first year. In the next year, you will earn 10% interest on ₹ 5,500, not just the original ₹ 5,000. This helps your investment grow faster. If you stay invested for the long term, you can substantially boost your returns.
Unlike compound interest, simple interest is calculated only on the initial principal and not the interest. Since it does not take into account the interest accumulated, your investment grows at a slower pace.
Below are the various types of compound interest investments in India. Investing in these can help you grow your funds:
Fixed Deposits or FDs are a type of term deposits that offer compounding benefits. You can open an FD at a bank, a post office or even through a Non-Banking Financial Company (NBFC). FDs offer a fixed interest rate that is added to the principal, either quarterly, half-yearly or annually. The interest earned is then compounded. With each compounding period, your interest is calculated on the new, higher total amount.
FDs are a low-risk investment, which makes them a reliable choice if you are looking to keep your money safe from market fluctuations while earning steady returns1.
The Public Provident Fund (PPF) is a government-backed savings scheme. The amount you invest in a PPF account earns interest that is compounded annually. You can invest up to ₹ 1.5 lakh per year in a PPF account. The account matures after 15 years, but you have the option to extend it in five-year intervals.
PPF also comes with tax* benefits. Contributions to PPF qualify for a deduction of up to ₹ 1.5 lakh subject to conditions prescribed under Section 80C* of the Income Tax Act, 1961, making it an attractive option for tax savings as well. PPF can be suitable for low-risk investors.
Life insurance savings plans, such as endowment plans and Unit-Linked Insurance Plans (ULIPs), not only provide life cover` but also offer a compounding component. These plans offer the dual benefit of financial protection and wealth creation. They can be suitable for conservative investors looking for life coverage` along with the opportunity to grow their investments.
Debt mutual funds invest in fixed-income securities such as certificates of deposit, commercial papers, bonds and other debt instruments. Since debt mutual funds are a type of mutual fund, they also benefit from compounding interest. The principal and the interest earned generates additional return over time. Debt mutual funds are low-risk investments, which makes them a suitable option for conservative investors.
ULIPs that invest in debt funds offer the unique advantage of exposure to fixed-income securities while also providing life insurance cover`. Since the underlying investment is in debt funds, you can enjoy the benefits of compounding and earn interest on the principal as well as the interest earned. ULIPs with debt funds can suit the needs of conservative investors2.
The National Pension Scheme (NPS) is a government-backed retirement savings scheme. It offers the flexibility to invest in a variety of asset classes, including equity, debt and alternative assets. The returns earned on these investments are reinvested into your NPS account, which helps your savings grow through compounding.
NPS requires a minimum contribution of ₹ 500 for opening of the account and investment of ₹ 1000 per annum for a Tier 1 account. For Tier 2 account, a minimum contribution of ₹ 1000 is required while opening the account and there is no minimum contribution requirement for the financial year3.
You can also claim a deduction of up to ₹ 1.5 lakh subject to the condition prescribed under Section 80C* of the Inccome Tax Act, 1961. The NPS can be adjusted based on your risk appetite, which makes it suitable for most investors.
Equity mutual funds invest in stocks and equity-related instruments of other companies. These funds carry a higher level of risk, but they also have the potential to deliver higher returns. As with other mutual funds, the returns earned are compounded, and both the principal and the interest generated are reinvested back into the fund. Equity mutual funds are most suitable for investors with a higher risk tolerance4.
ULIPs that invest in equity funds combine the benefits of stock market exposure with life insurance coverage`. Since the plan primarily invests in equity funds, your money grows through compounding. However, it is important to note that, like any equity investment, these plans carry a higher level of risk.
Opting for compound interest investments in India can fast-track your financial progress. However, it is important to be mindful of the risks associated with different investment options. Make sure to choose instruments that align with your risk tolerance and financial goals so you can earn more without being stressed about low returns.
