See How Small Investments Can Grow Over Time With A Compounding Calculator

The power of compounding has the potential to make small investments grow into significant amounts over a long horizon. A compounding calculator can help investors see this potential effect on their investments. This article tells you more about how a compounding calculator works and how to incorporate it into your investing journey.

• Table of contents

1. What is compounding?
2. Visualising growth with compounding calculator
3. How to use a compounding calculator
4. Advantages of a compounding calculator

What is compounding?

Compounding is a powerful financial concept that can help your investments grow at an accelerated rate with time. Compounding happens when the interest or returns you earn on your principal are reinvested and go to earn further interest/return. As a result, your base or principal amount keeps growing. This cycle continues throughout your investment period and can result in a snowball effect that can potentially create wealth over time.

Let’s see the effect of compounding through an example. Assume that you make a one-time investment of Rs. 10,000 for a period of 10 years at an annual interest rate of 10%. Without compound interest, you will earn interest only on the principal amount, which means you will earn Rs 1,000 a year. Over 10 years, you would have earned Rs 10,000 on an investment of the same amount, which amounts to Rs 20,000.

Now, let's consider the same investment with compounding. In this case, you will earn interest not only on the principal amount but also on the accumulated interest. So, your principal of Rs. 10,000 will earn 10% interest in the first year. Your total principal for the next year will now be Rs 10,100 on which an additional 10% will be earned, and so on. At the end of the compounding period, your corpus will grow to approximately Rs. 26,000. This is significantly higher than the returns in the first scenario.

Visualising growth with compounding calculator

When you are investing, especially in small amounts, it can be difficult to visualise the return potential on your investments. This could even lead to inconsistency in investing or the temptation to pause, stop or reduce your investments.

A compounding calculator can help you stay invested in such times by showing you the projected potential returns on your investments. When you enter the principal amount, interest rate or estimated rate of return, and investment horizon, the calculator shows you the projected return on your investment.

How to use a compounding calculator

Bajaj Finserv AMC has a free online compounding calculator. To use it, follow these steps:

• Enter the principal amount: This is the initial amount you are investing.
• Enter the interest rate: This is the expected rate of annual compound interest you can earn on your investment.
• Enter the compounding frequency: This is the number of times interest is compounded in a year. The most common compounding frequencies are monthly (12 times a year), quarterly (4 times a year), and annually (once a year).
• Enter the investment horizon: This is the number of years you plan to hold the investment.
• Click on ‘calculate’. The compounding calculator will then provide you with the projected returns on your investment.

Do note that the calculator assumes a fixed interest rate, whereas returns on your mutual fund investment will depend on market conditions and may fluctuate.

Advantages of a compounding calculator

• Helps you visualise long-term growth: A compounding calculator allows you to see how your investments can potentially grow over time, helping you make informed decisions.
• Ease of use: Compounding calculators are simple to use and require only basic information, making them accessible to everyone.
• Encourages smart investing: By using a compounding calculator, you can identify the most suitable investment strategies for your unique objectives and risk tolerance.
• Aids in goal planning: Investors can set specific financial goals and determine the required investment amount needed to potentially achieve those.
• Customisation: You can customise the calculator to suit your specific investment plan by changing the principal amount, interest rate, compounding frequency, and investment horizon.

Conclusion

Understanding how small investment can grow with compounding calculator can help you estimate projected returns and make informed decisions along your financial journey. You can use an online compounding calculator, such as this one from Bajaj Finserv AMC to see the potential power of compounding on your investments and plan effectively.

FAQs:

How does compounding work?

Compounding happens when the interest earned on the principal amount is reinvested and further interest is earned on both the principal and the previously accumulated interest. This process continues, resulting in exponential growth over time.

How can I make the most of compounding for my investment?

To make the most of compounding, stay disciplined, invest regularly, and maintain a long investment horizon to allow compounding to work its magic.

How can I use a compounding calculator to plan my investments?

You can use a compounding calculator to estimate the projected returns on your investments by feeding the principal amount, interest rate, and investment horizon into the tool. This can help you make informed decisions about your financial planning and choose the most suitable investment strategies.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.