source: adda247

If you want to increase your money, consider the possibilities for compound interest investments. Its importance lies in its ability to generate exponential growth in your wealth over time. Multiple options are available in India, such as fixed deposits, mutual funds, and more.

This article will explore where to invest to get compound interest, different options, and their benefits. So read on to find out about their prospects and how you can use them to make money.

Compound interest is interest calculated on both the principal (the original sum of money) and the interest accumulated over time. It is, in other words, interest on interest. The interest collected increases the principal amount over time, and subsequent interest calculations are based on the larger sum. 

Compared to simple interest, which is calculated only on the principal amount, the compounding effect enables the investment or loan to increase quickly over time. Compound interest can be used for various financial instruments, including loans, investments, and savings accounts. It is the working principle behind the growth of money and the build-up of debt over time.

1. Public Provident Fund (PPF)

PPF is a long-term investment option with competitive interest and return rates. These investments are considered safe and offer tax benefits, making them a preferred choice for low-risk investors looking for long-term savings and tax-saving options.

• How/Where to Invest: You must deposit into your PPF account with an authorised bank or post office at least once every 15 years. You require a minimum deposit of ₹500 and a maximum deposit of ₹1.5 lakhs to open a PPF account. One has two payment options: a single large payment or 12 smaller payments.

• Risk: PPF programmes are provided and supported by the government. Therefore, it offers security and a guarantee for your deposits.

• Contribution Compliance: PPF has a minimum annual contribution requirement of ₹500 and a maximum limit of ₹1.5 lakhs as per current rules. Monitoring compliance with these limitations on contributions is a crucial KPI for ensuring that the money being invested is in accordance with the laws and regulations.

• Withdrawal: You can withdraw funds from your PPF account after five years of regular contributions. You must collect Form-C (PPF Withdrawal Form) from your chosen bank, fill it out, and send it to the bank along with a withdrawal request to do so.

2. Fixed Deposits

A fixed deposit is a kind of savings cum investment instrument with a definite time and interest for a certain amount deposited. Here, the rates offered by various financial institutions vary. You can open an account offline as well as online. Here are its key features:

• How/Where to Invest: You can invest in fixed deposits for a specified period or tenure. Options for the deposit period often range from a few months to many years. Generally, the minimum investment amount for a regular bank FD is ₹5,000.
• Risk: Fixed deposits are one of the investment instruments provided by banks with interest rates generally higher than a regular savings account.
• Contribution Compliance: Contribution compliance is not applicable for fixed deposits, since fixed deposits, unlike PPF, are a one-time investment made when opening the deposit account.
• Tax Benefits: Fixed deposits offer tax benefits, with investments up to ₹1.5 lakhs per year being eligible for deduction under Section 80C of the Income Tax Act.
• Withdrawal: Fixed deposits allow for early withdrawal. However, they have a penalty or charge for premature withdrawal, varying between 0.5% to 1%.

3. Life Insurance Savings Plans

A savings plan is a type of insurance that offers the chance to save money aside and build up finances for the future. It also provides protection for the policyholder, safeguarding their family's financial future.

• How/Where to Invest: While there is no upper limit on the amount you can invest, the minimum investment is ₹500. Long-term investing helps you to get free bonus additions to increase the value of your money in the plan.
• Risk: The risks are lower than other investments as you receive guaranteed returns as a maturity benefit. However, some risk is associated with these plans depending on several factors, including the specific type of savings plan, the insurance company offering the plan, and your financial situation and goals.
• Contribution Compliance: These plans typically require regular premium payments, such as monthly, quarterly, half-yearly, or yearly. Moreover, you must also comply with the premium amount and policy renewals.
• Tax Benefits: The premiums paid towards many life insurance plans may be eligible for tax deduction under Section 80C of the Income Tax Act up to a certain limit. Furthermore, the maturity proceeds or death benefit from ULIPs may be tax-exempt under Section 10(10D) of the Income Tax Act, subject to certain conditions.
• Withdrawal: You can make a partial withdrawal from your savings insurance plan in case of an emergency. As per Section 10(10D) of the Income Tax Act, if your premium payable is not more than 10% of the sum assured, your partial withdrawal amount will be exempt from taxation. However, if your policy was purchased before April 1, 2012, and the premium is not more than 20% of the sum assured then your withdrawal will be tax-free.

4. Equity-Linked Savings Scheme (ELSS)

ELSS is a form of mutual fund that invests largely in equities or stock markets.

• How/Where to Invest: The most convenient option to invest in ELSS is to open an Online Investment Services Account. You have two investing options: one lump sum payment or through a SIP (Systematic Investment Plan). A SIP can start with a minimum of ₹500 and has no higher limit.
• Risk: ELSS are high-risk, high-return investments that invest in market-linked instruments and depend on the performance of underlying securities. So, they do not provide guaranteed returns.
• Expense Ratio: The expense ratio is the percentage of assets deducted by the fund house to cover the expenses of managing the fund. A lower expense ratio indicates that a higher portion of the returns is being passed on to the investors, potentially resulting in higher net returns. Comparing the expense ratio of an ELSS fund with its peers can help assess the cost-efficiency of the fund.
• Withdrawal: You can redeem your ELSS units all at once when the lock-in period expires after three years. There are two methods to redeem ELSS investments, online or offline.

5. Equity Mutual Funds

In equity mutual funds, your money is invested in equities of various firms. These are also known as growth funds. It offers higher returns than fixed-income investments and debt funds, which is advantageous for you. 

• How/Where to Invest: To invest in equity mutual funds, you can create a Demat account with a broker company. Additionally, with a minimum investment of ₹100, one can participate in a mutual fund SIP.
• Risk: These funds may have liquidity risks. Therefore, it could be difficult for you to redeem your assets without suffering a loss. There is also considerable risk involved because it is based on market conditions and the company's success.
• Tax Benefits: You can save taxes by investing in equity mutual funds, which allow you to claim tax advantages under Section 80C.
• Diversified Portfolio: You may put a small amount of money into equities mutual funds, turn a profit, and diversify the companies in your portfolio.
• Withdrawal: Equity mutual funds are mostly open-ended, which means that you can withdraw them at any given time without a penalty. However, investments such as ELSS have a lock-in for 3 years, which may be useful for long-term investors.

The main features of compound interest investment options are as follows:

• Reinvestment of Interest: Compound interest investment options typically allow for the reinvestment of interest earned. This means that the interest earned on your initial investment is reinvested into your funds, allowing it to earn additional interest in subsequent periods. This compounding effect can result in exponential growth of your investment over time.
• Higher Returns Over Time: Due to the compounding effect, compound interest investment options can generate higher returns over time than simple interest investments. As the interest earned is reinvested, it generates additional interest, leading to the exponential growth of your investment over time.
• Long-Term Investment Horizon: Compound interest works best when investments are held for a long period, allowing the compounding effect to work its magic. Compound interest investment options are often designed for long-term investment horizons, such as retirement funds or long-term savings plans, where the power of compounding can be fully realised.
• The flexibility of Investment Amount: Compound interest investment options may offer flexibility in the investment amount, allowing investors to start with small amounts and gradually increase their investments over time. This can make it accessible to many investors and allow regular investments to take advantage of the compounding effect.
• Diversified Investment Portfolios: Compound interest investment options may offer diversified investment portfolios, which can help spread the risk across different asset classes, sectors, or geographies. Diversification can lower the overall risk of the investment and enhance long-term returns.

Some of the major benefits you can get from Compound Interest Investment are as follows:

• Multiplies your profits: It maximises your returns by growing exponentially over time, resulting in higher returns than simple interest.
• You can start small: Compound interest investments can be started with a small initial investment. Therefore, it is accessible for investors with limited funds.
• Diversification of opportunities: These provide opportunities for diversification, which means spreading your investment across different asset classes, such as stocks, bonds, insurance, etc. Diversification can help mitigate risks by lowering the impact of poor performance in one investment on your overall portfolio.

Some of the risks involved with Compound Interest Investments are:

• Suitable for long-term Investors only: It is most advantageous over the long term as it needs a longer time horizon to fully benefit from the compounding effect, which may not be suitable for short-term financial goals.
• May result in a heavy financial burden: If you are not careful with your investments, the compounding effect can also work against you, resulting in a significant financial burden if you accumulate debt or incur high-interest rates.
• Inflation risk: Inflation decreases the purchasing power of money over time, and compound interest investments may not always keep up with inflation

This article discusses how compound interest is a powerful tool for investors in India, along with various options where to invest to get compound interest, such as fixed deposits, public provident funds, equity investments, etc. These options offer tax benefits, diversification, and the potential for higher returns. 

However, they also come with risks such as inflation risks, market risks or liquidity risks. So, you must thoroughly research these options to make informed investment decisions.