Compound interest: Know meaning; investment schemes; and how you can become crorepati through compound interest

Compound interest makes your money grow faster. The longer the duration of the investment, the more compound interest you get.

Compound interest is calculated on both the principal amount and the accumulated interest from prior periods. Image: PTI

Compound interest, sometimes known as 'interest on interest,' is calculated on both the principal amount and the accumulated interest from prior periods. It can make you a crorepati in a few years if you invest money in a systematic investment plan (SIP). Know calculations in this write-up.

Compound interest makes your money grow faster. The longer the duration of the investment, the more compound interest you get.

On the other side, simple interest is calculated only on the principal amount you invest initially.

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In this article, we will discuss a few schemes that provide compound interest.

Fixed deposit: A fixed deposit, as the name implies, comes with a predetermined time and interest for a quantity of money. Different banks provide different rates. It is available both offline and online.

It is considered one of the safest schemes in India. It also provides you with income tax benefits.

Systematic Investment Plan: SIP, or Systematic Investment Plan, is a smart investing strategy these days. SIP allows you to invest in installments. The compound interest on SIP is determined by the duration of investment.

Although the profits of SIP are dependent on the stock market performance, experts believe it may offer you annual returns of roughly 12 per cent and sometimes up to 15 per cent.

Provident Fund: Provident Fund (PF) can be a better option for people in jobs. PF also provides you compound interest benefits, and it is better than other savings plans. Currently, PF is providing 8.15 per cent interest.

Public Provident Fund: Any Indian citizen can invest in Public Provident Fund (PPF). This is one of the oldest and safest ways to invest. The current interest rate of PPF is 7.1 per cent. If you invest for the long term, you can get the benefit of compound interest. One can invest in PPF for 15 years and get tax-free money on maturity.

How to become a crorepati though compound interest

One of the best investment plans to get compound interest is investment in a mutual fund through SIP. Such an investment is expected to give you consistent growth plus compound interest that will help grow your income fast. If you invest just Rs 20,000 a month, Rs 2.40 lakh a year, or just Rs 36 lakh in total, and get a presumed growth fo 12 per cent a year, you will become a crorepati in those years. In such a scenario, you will get Rs 64.9 lakh as capital gains in that period. The difference between the investment and the capital gain shows the power of compounding. You get nearly two times gain than your investment.

Here, we are taking 12 per cent growth as ideal because in the last few years, SIP has shown growth of 12 per cent annually.

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