The power of compounding is a well-known concept in finance that refers to the ability of an asset to generate earnings on previous earnings. In other words, it refers to the exponential growth of money over time, due to the interest earned on the original investment as well as on any subsequent interest earned. Compounding can have a profound impact on the growth of investments, especially over long periods of time, making it a popular tool for wealth creation.
In India, one of the popular investment instruments that harnesses the power of compounding is the Public Provident Fund (PPF). The PPF is a long-term savings scheme that is backed by the government, and is designed to encourage people to save for their future. The scheme is particularly popular among small investors and salaried individuals, who are looking for a safe and secure investment option.
One of the key benefits of investing in PPF is the interest rate offered by the scheme. The interest rate on PPF is determined by the government and is reviewed on a quarterly basis. Currently, the interest rate on PPF is 7.1% per annum, which is higher than most fixed deposit schemes offered by banks. This high interest rate makes PPF a lucrative investment option for individuals looking to create wealth over the long term.
The compounding effect in PPF works in a simple way. The interest earned on the investment is added to the original investment and is then used to calculate the interest for the next year. This process continues year after year, and the interest earned compounds over time. As a result, the investment grows at an exponential rate, resulting in substantial growth over the long term.
For example, consider an investment of INR 100,000 in PPF with an interest rate of 7.1%. After one year, the investment would have grown to INR 107,100, including the interest earned. In the second year, the interest earned would be calculated on the entire INR 107,100, resulting in an interest of INR 7,497. The investment would then grow to INR 114,597 at the end of the second year.
As the investment continues to grow year after year, the compounding effect becomes more pronounced, resulting in substantial growth over the long term. After 15 years, the investment of INR 100,000 would have grown to INR 196,961, assuming a constant interest rate of 7.1%. This demonstrates the power of compounding and how it can help individuals grow their wealth over the long term.
Another advantage of investing in PPF is the tax benefits offered by the scheme. Contributions made to PPF are eligible for tax deductions under Section 80C of the Income Tax Act. The interest earned on the investment and the maturity amount are both exempt from taxes, making PPF a tax-efficient investment option.
In conclusion, the Public Provident Fund is an investment option that harnesses the power of compounding, making it a popular choice among small investors and salaried individuals in India. The scheme offers a high interest rate of 7.1% per annum, which is higher than most fixed deposit schemes offered by banks. The compounding effect in PPF results in substantial growth over the long term, making it a great tool for wealth creation. Additionally, the tax benefits offered by the scheme make PPF a tax-efficient investment option, making it an attractive investment choice for individuals looking to save for their future.
Public Provident Fund (PPF) is a savings scheme offered by the Government of India to encourage long-term savings and investments. PPF is a tax-free investment, which means the investment made, the interest earned, and the maturity amount received are all exempt from tax. A PPF account can be opened with a minimum investment of INR 500 and a maximum investment of INR 1.5 lakh per financial year. The interest rate on PPF is determined by the government and is subject to change every quarter. The interest rate is currently 7.1% per annum, compounded annually. PPF has a maturity period of 15 years, which can be extended for a block of 5 years at a time. A PPF calculator can be used to calculate the maturity amount of a PPF account based on the investment made and the interest earned.