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- "Unlocking the Eighth Wonder of the World: The Power of Compounding"
"Unlocking the Eighth Wonder of the World: The Power of Compounding"
The power of compounding, often hailed as the "Eighth Wonder of the World," holds the key to building substantial wealth over time. It's the art of earning interest on interest, and the formula is simple: start early, stay invested, and let time work its magic. To illustrate the astounding potential of compounding, we'll delve into the journey of a Public Provident Fund (PPF) investment, . We will also examine the options available for investment in different asset classes, from equities to real estate, and highlight how these choices can significantly impact your financial future.
The PPF Journey:
Let's begin by considering the case of a Public Provident Fund (PPF) account with a 15-year lifespan. Assuming an annual investment of ₹1.5 lakh and an interest rate of 7.1% (as of now), what will the account balance look like at various milestones?
After 15 Years: You'd have ₹41 lakh, and the best part is no tax is levied on this sum.
Extending for 20 Years: If you decide to continue contributing and extend the account every five years, by the end of the twentieth year, your investment would be worth ₹67 lakh.
Reaching the 25th Year: At this point, your investment would be worth an impressive ₹1.03 crore.
The 30th Year: Your investment would have grown to a remarkable ₹1.55 crore. In just 15 years, it multiplies more than threefold!
Investment Options: Equities, Debt, Real Estate, and Gold
With compounding in mind, let's explore different investment options and see how they've performed over the last ten years.
Gold (Returns: 7.5%): An investment of ₹1 lakh in gold in 2013 would have grown to ₹2.95 lakhs by 2023.
Nifty (Returns: 13%): The Nifty index offers substantial returns, turning a ₹1 lakh investment into ₹6.13 lakhs over the same period.
Real Estate (Returns: 4.8%): Real estate investments would have grown to ₹2.02 lakhs.
Debt (Returns: 6%): Debt investments would yield ₹2.40 lakhs after ten years.
The Impact of Time:
The key takeaway here is the longer your money stays invested, the more significant the compounding effect becomes. While equities, represented by the Nifty index, have outperformed other assets over the last decade, it's essential to note that they come with higher volatility and risk. Diversifying across different asset classes can help mitigate risk and balance your portfolio.
About the Author : Suman Agarwal, an equity expert who offers guidance and recommendations on how to invest.
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