What are the Best Compound Interest Investment Options?

Compound interest investment options are one of the smartest ways that you can opt for regardless of the amount you invest in. The core factor in compound interest is time, and the more time you have, the higher the payoff.

Be it investing your hard-earned money or accumulating wealth, compound interest is the best way to pool more capital into your nest egg. But it is not as simple as it sounds, it takes careful planning and time. And if you play your cards right, you can have a suitable sum by the time you have retired to enjoy your golden years.

Of course, you have to do tons of prep work for this. The extra push that can enable you to grow long-term wealth, without having to toil later is compound interest investments. And to give you that push, I’m drafting this article to explore some of the best compound interest investments. So, watch this space and keep on reading till the end.

What is Compound Interest?

The interest accumulated on a deposit from both the principal and accumulated interest is called compound interest. In simple words, it is the interest that you earn on interest. You can choose annual, monthly, or even daily compound interest frequencies as per your suitability.

Let's think about compound interest like a snowball. The faster you start saving your finances, the more money in your snowball, and the larger it becomes.

Types of Compound Interest Investment Options

Compound interest investments can be classified into two different categories as described below:

a) Safe Compound Interest Investments

These investments have a higher degree of safety with foreseeable and expected returns. For instance, you can rely on safe compound interest investments even when there are fluctuations in the market. If you are a low-risk investor who aims for steady returns, then this option is the best option for you.

b) Aggressive Compound Interest Investments

These investments aim at maximising returns with higher levels of risk. For instance, there is potential for both large gains and at the same time, also chances of significant losses.

Aggressive compound Interest investments do not guarantee stability and steady growth. However, offer higher growth for long-term and consistent investors.

Must Read - Passive Investing

Best Compound Interest Investment Options in India

The best compounding interest investments in India include both safe and aggressive investments. Here is the list of compounding investment options in India:

a) Fixed Deposit

As the name suggests, a fixed deposit is a type of deposit with a fixed period and interest for a sum of money. Different banks offer varied rates. It can be opened both offline and online. To understand whether you should invest in a fixed deposit, we need to understand its following features:

Fixed Rate of Return

Fixed deposits guarantee the return specified after you have invested your funds. Financial institutions provide interest rates on their website and also have a fixed deposit interest calculator where you can calculate the interest against the sum of money and time.

Tax Limits for Interest Income

If the total interest earned by you does not exceed Rs. 10,000, then tax will not be deducted. This can be beneficial for you if deposits are made in small amounts.

Flexible Period

The period for a fixed deposit can be decided by you at your convenience. However, every bank has its minimum tenure. You can redeem or extend the fixed deposit once the decided period comes to an end.

Availing Loans

You can avail of a loan against the fixed deposit. Generally, the loan can be taken up to an amount of 95% of the total fixed deposit. However, this percentage is different from one bank to another.

b) Public Provident Funds

It is a long-term investment option with attractive interest and return rates. Through this saving scheme, you can make sure to have a sufficient amount of money for retirement. Following are the features of PPF in brief:

Period

The PPF that you take must be for at least 15 years. After 15 years, you can extend it every 5 years.

Investment Amount

For opening a PPF amount, you need a minimum deposit of Rs. 500 and a maximum of Rs. 1,50,000. You can make the entire payment in one go or by paying small amounts in 12 instalments.

Deposit Amount and Modes

You have to deposit at least once in your PPF account in 15 years. This deposit can be through cheques, cash, or even online. The minimum annual investment can be Rs 6000.

Risk

PPF schemes are provided and backed by the government. This offers a guarantee and safety for your deposits.

c) Life Insurance Saving Plans

Life insurance savings plans are safe long-term investments which offer guaranteed returns. For instance, iSelect Guaranteed Future from Canara HSBC Life Insurance offers the following benefits:

Guaranteed Returns

Maturity proceeds are guaranteed and predefined. You can contribute for the entire policy period or for a limited time at your convenience.

Bonus Additions

Investing for the long term allows you to receive free bonus additions which enhances your fund value in the plan.

Regular Income Option

In iSelect Guaranteed Future Plan, you have the option to start receiving a regular income once you turn 60. This is a survival benefit and does not affect your life cover.

d) Debt Mutual Funds

These are one kind of mutual fund where the amount is invested in securities with fixed income. Such securities include treasury bills, commercial papers, corporate bonds, and certificates of deposits. The following are features of such funds:

Lower Risk Levels

Debt funds are invested in securities whose rate of return and maturity value are already known to you. This ensures less risk and a steady return.

Period

The period of such funds is very flexible and varies from just one day to years depending on the type of fixed securities.

Credit Quality

Based on credit, all the securities are rated. The fixed income securities are backed by the government and are a secure option for you.

e) Unit Linked Insurance Plans with Debt Funds

A ULIP is a combination of insurance and investment. In simple words, the premium amount paid by you is partly used for insurance and partly for investment in debt. These debt funds include debentures, government bonds, securities, and corporate bonds. Following are the features of ULIP with debt funds-

Risks Associated

These kinds of mutual funds come with medium to low risks.

Shifting Funds

If you see too many fluctuations in the market, you can change from one fund to another.

Tax-Savings

You can have tax savings as premiums paid towards ULIP are tax deductible up to Rs. 1,50,000 as per Section 80C of the Income Tax Act, 1961.

Withdrawal

During emergencies, you can withdraw funds once the lock-in period has ended.

f) National Pension Scheme

In such schemes, your savings are pooled from time to time in one fund which is invested based on guidelines in numerous portfolios including government bonds, debentures, and shares.

Voluntary

The scheme can be opted by Indian citizens between the ages of 18-65 years who are in the working sector.

Flexible

From Rs. 500-1000 per annum, you can continue the account even with low and flexible investment amounts.

Independence

This scheme is a means of ensuring financial independence for you after you retire.

Secured Option

Since it is regulated by the government of India, it is a safe source of investment.

g) Equity Mutual Funds

In these funds, your finances are invested in stocks of different companies. These are also called growth funds. It is beneficial for you since it has higher returns than both FDs and debt funds. Following are its features:

Risk

There is a high risk associated as it is dependent on the market conditions and performance of the company.

Tax Savings

You can save tax as equity mutual funds schemes allow you to claim tax under 80C.

Diversified Portfolio

You can invest small amounts in equity mutual funds and make a profit and have different stocks in your portfolio.

h) ULIP with Equity Funds

Like other ULIPs, it is a combination of both insurance and investment. In this category, the investment is riskier since it is associated with fluctuations in the market. Following are its features:

Easy Switching

In such plans, you can easily switch your funds from debt to equity and equity to debt as per your suitability and market conditions.

Risk

High risk is associated with higher returns. Therefore, you should opt for this plan only if you have a greater risk appetite.

Transparency

All charges with such plans are clearly shown to you. These include charges for allocation and fund management.

Investment Term & Tax Savings

With plans like Invest 4G ULIP from Canara HSBC Life Insurance, you can invest in plans up to 99 years of age. With a limited pay option, you can build your retirement corpus till the age of 60 and then draw a tax-free pension until the corpus lasts.

Also Read - Defined Benefit Pension Plan

The switching option allows you to switch your corpus in equity funds to debt anytime.

Four keys to effective compounding are- budgeting, planning, investing, and diversifying your portfolio for the best compounding effect of your wealth. Diversification of the portfolio by including both safe and aggressive compound interest investments for minimising overall risk combined with adequate financial planning can be the ideal strategy for your finances.

However, it is vital to keep in mind that compounding will not take place effectively without having a proper time horizon. And if you can do this over time, you will probably see your wealth growing which will in turn map your way to financial freedom.