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Best Compound Interest Investments India

Investing your hard-earned money is perhaps the only way to build your wealth over time, right? If you wish to increase your wealth, then compound interest investment options can be a wise choice. Life Insurance Plans, ULIP’s, PPFs, bank FDs, mutual funds, etc., are among the investment options you can choose from. Read on as we explain the concept of compound interest, its benefits, and where you can invest when looking for the best compound interest investments India.

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Compound Interest Investment

What is Compound Interest?

Best Compound Interest Investment
October 24, 2024

Table of Content

What are the Best Compound Interest Investment Options

Compound interest refers to the interest accumulated from both the principal (the originally invested money) as well as the interest component of your deposited money. In simpler words, it is the interest you earn on your deposit's interest, be it annually, monthly, daily, or quarterly. You can think of compound interest like a snowball. The earlier and quicker you start investing your money, the more money your snowball will get in, thus becoming larger and larger by accumulating interest.

Types of Compound Interest Investment Options

  • Aggressive Compound Interest Investments

The first type of compound interest investment plan is the aggressive one, which aims to maximise your returns by taking a higher level of risk. However, while there is indeed potential for bigger gains this way, there is also the chance of incurring significant losses, as there is no guarantee of stability and growth. However, in general, high growth potential is seen when investors invest consistently over the long term.

  • Safe Compound Interest Investments

The second type of compound interest investment is the safe one, which, as its name suggests, offers a higher degree of safety along with predictable returns. This way, you can rely on these safe compound interest options even when there are ups and downs in the market. This type of investment can be suitable for low-risk takers who wish to get safe and steady returns from the best compound interest investments in India.

Best Compound Investment options in India

When choosing the best investment option that provides compound interest benefit, it's important to know which options there are to choose from and whether to fall into the safe category or the aggressive one.

Safe Compounding Investments

Aggressive Compounding Investments

Debt mutual funds

NPS (National Pension Scheme)

Fixed Deposits

ULIPs with Equity fund investment

PPF (Public provident fund)

ELSS (Equity linked savings scheme)

NSC (National Savings Certificate)

 

Life insurance savings plans

 

Unit linked insurance plans in Debt Fund investment

 

 

1. Public Provident Fund (PPF)

PPF is among the most popular long-term investment options in India. It offers a safe investment avenue, as it is backed by the government in the form of a sovereign guarantee, thus making it a preferred choice for investors with low risk appetite.PPF has a lock-in period of 15 years, and the account can be opened with any authorised bank or post office with a deposit amount of Rs 500-Rs 1.5 lakh.

As far as liquidity is concerned, PPF does allow investors to make premature withdrawals and even take loans against their PPF account. The current interest rate on PPF is 7.1% p.a.

2. Fixed Deposits

Bank FDs are option investors consider among the best compound interest investments India. Fixed deposits let you save your money for a specified tenure with the bank, during which the interest rate remains fixed irrespective of the market's ups and downs. The interest rates vary across different tenures and across various banks.

The risk involved in bank FDs is minimal, as they are considered a safe haven for depositing your money. Also, you can also avail of tax benefits of up to Rs 1.5 lakh in a year, under Section 80C, through five year tax saver FDs.

Bank FDs also allow you to make premature withdrawals (along with a penalty), besides giving the option of a loan against FD too.

3. Life Insurance Plans

This is a type of insurance plan that allows you to achieve both goals of saving money as well as building wealth for your future, and at the same time get your loved ones financially insured in case of your unfortunate demise.

The minimum amount you can invest is Rs 500, with no maximum limit. You need to pay the premiums in a timely manner, such as monthly, annually, or quarterly. The returns are guaranteed, but there is minimal risk associated with life insurance savings plans, depending on the type of plan chosen and the insurer chosen to do so.

Also, keep in mind that such savings plans' premiums can be claimed as tax deductions under Section 80C1, up to Rs 1.5 lakh a year. As far as withdrawal is concerned, you can partially do so in case of emergencies.

4. National Savings Certificate

Another govt-backed scheme that you can consider when looking for the best compound interest investments India is NSC. It is offered by selective banks and post offices and is popular for its income tax benefits and investment safety.

NSCs are available for investment in two forms: physical certificates as well as electronic NSCs. It is also considered a low risk investment option, with the interest also fixed. Moreover, like PPF, investment in NSC is eligible for tax benefits under Section 80C1. But keep in mind that the interest earned is taxable upon maturity, which is usually five years.

5. Debt Mutual Funds

These are a category of mutual funds that invest your money into fixed-income securities like debentures and corporate and government bonds. They offer the potential of capital protection and regular income, thus making debt funds a suitable option for investors seeking moderate returns with low risk.

You can invest in debt mutual funds either via mutual fund houses or RIAs (registered investment advisors). The risk in the case of debt funds is much lesser than equity, but there are still risks such as interest rate risk, issuers' credit risk, as well as market fluctuations. Also, debt funds do not offer any income tax benefit. As far as withdrawal is concerned, you can redeem the funds anytime, but there might be an exit load that can be charged if you redeem before a specific period.

6. Unit Linked Insurance Plans (ULIPs) with Debt Fund Investment

The insurance cum investment option ULIP gives you a mix of growth and protection through the option of choosing debt funds as your investment option for a part of your premium.  

As far as risk is concerned, ULIPs that have debt fund investments are usually considered less risky than equity funds. However, some degree of market risk is still present with ULIPs that have debt fund investments.

Moreover, ULIPs offer income tax benefits on both the premium as well as maturity amount, under Section 80C. Keep in mind that ULIPs typically have a five year lock-in period, after which partial withdrawals can be allowed.

7. Equity-Linked Savings Scheme (ELSS)

Another category of mutual fund you can opt for when selecting the best compound interest investments India is ELSS. ELSS invests your money largely into equities and the stock market. You can either invest in ELSS in lumpsum or through SIP mode. While ELSS does involve market risk, it also offers the potential for higher returns.

But keep in mind that ELSS has a three year lock-in period, after which the investment can be redeemed or reinvested. ELSS investment can be claimed as a tax deduction under Section 80C1, up to Rs 1.5 lakh a year.

8. National Pension Scheme (NPS)

NPS (National Pension System) is a retirement and pension savings scheme aimed at providing investors with a steady income post retirement. This market-linked investment option is offered by banks, post offices, and other financial institutions as well. By regularly contributing into NPS through various investment options like corporate bonds, equity, govt securities, etc, you can create a big corpus for your retirement years. The risk involved in NPS can be managed through diversification into bonds and equities.

Moreover, NPS contribution is eligible for tax deduction under Section 80C1 and 80CCD1, up to a total of Rs 2 lakh in a year. Also, keep in mind that a part of your withdrawn amount from NPS is tax free, while the remaining gets taxed as per your tax slab.

9. ULIP with Equity Funds

ULIPs also allow you to invest a portion of your premium in equity funds so that you can capitalise upon the potential of higher returns. Keep in mind that equity funds are subject to the market's ups and downs, but a diversified portfolio can help you manage the risk.

As far as tax benefits are concerned, ULIPs offer income tax benefits on both the premium as well as the maturity amount, under Section 80C. ULIPs typically have a five year lock-in period, after which partial withdrawals can be allowed.

Features of Compound Interest Investment Options

The key features of compound interest investment options are mentioned below:

  • Reinvestment of Interest: Compound interest investment options usually allow the reinvestment of earned interest. This compounding benefit and effect can result in exponential growth for your investment over the long term.
  • Higher Returns: The compounding effect provides the potential for higher returns than simple interest investments.
  • Long-Term Investment Horizon: The power of compound interest investment options becomes bigger when the aim is long term, such as 20 years or 30 years.
  • Flexibility of Investment Amount: Investment options providing compound interest often offer flexibility in investment amounts, such as something as small as Rs 500 or Rs 1,000. This makes the investment options more accessible for retail investors.
  • Diversification: Compound interest options also offer a degree of diversified investment to your portfolio by giving access to different asset classes, which can thus minimise your overall risk and maximise returns.
  • Tax Benefits: Many investment options offering compound interest provide income tax benefits, too, thus reducing the overall tax burden of investors.
  • Professional Expertise: Many compound interest investment options, like mutual funds, provide professional expertise and management to help investors build wealth.
  • Liquidity: Some compound interest investment options offer a high degree of liquidity through the facility of premature withdrawal and loans.

Advantages of Compound Interest Investments

Some of the major advantages of compound interest investment options are:

  • Multiplication of Profit: Your returns and profits get multiplied as your money grows exponentially over time due to compounding.
  • Small Investment Amount: Investment options offering compound interest can mostly be started with very small initial investments, such as Rs 500, thus making it accessible for most investors.
  • Diversification: Compound interest investment options also provide diversification opportunities for asset classes in your portfolio, such as stocks, insurance, bonds, etc.
  • Long-Term Wealth Creation: Compound interest investments provide the potential to maximise returns in the long term, such as 20 or 30 years. This helps investors create long-term wealth.
  • Tax Advantages: ELSS and PPF are among the compound interest investment options that offer income tax advantages, which thus reduce investor’s overall tax burden.

Disadvantages of Compound Interest Investments

Some of the major disadvantages of compound interest investments are as follows:

  • Less Suitable for Short-Term Investors: Given that compound interest investment options are most beneficial in the long term, short term investors may not find such options suitable.
  • Risk of Financial Loss: For investors who are not careful with their investment choices and decisions, the compounding interest effect can result in the burden of loss, such as in the case of market linked investments like ELSS.
  • Inflation Risk: Inflation lowers your purchasing power and the value of your money over time, against which compound interest investment options may not be able to always keep up.
  • Market Volatility Risk: Some compound interest investments, such as ELSS, are subject to market linked fluctuations, which can erode your gains and turn them into losses.

Conclusion

It's true that compound interest is a great tool that helps investment options like bank FDs, ELSS, PPF, etc, offer higher returns in the long run. Besides high returns, such investment options also offer income tax benefits and the scope of diversification. However, they also possess risks like liquidity risk, inflation risk, and market risk, which need to be understood before investing your hard earned money into them.

FAQs on Best Compound Interest Investments India

Q. What is the best way to maximise the benefits of compound interest investments?

The best way to maximise the potential benefits of compound interest investments is by investing for the long term, such as 20 or 30 years.

Q. How can I pick the best option for compound interest investments in India?

The best compound interest investments India would depend on your risk appetite, financial goals, investment horizon, expected returns, and investment amount.

Q. Are compound interest investments taxable in India?

Some of the compound interest investments in India, such as PPF, are tax free, while others, such as debt mutual funds, ELSS, and bank FDs, see their returns being taxed.

Q. Can I use a loan to invest and benefit from compound interest?

Generally, it is not wise to take out a loan to invest your money, given that you would incur interest on that loan that you need to repay. Moreover, if your investment turns into a loss, it would heavily burden your finances with the already ongoing loan.

Q. Which investment is best for compound interest?

The best compound interest investment option would depend on your risk appetite, financial goals, investment horizon, expected returns, etc.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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