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What Is The Power Of Compounding?

Certain life goals like traveling the world, having a dream wedding, sending the kids abroad for higher education, etc. are very close to our hearts. These goals require careful financial planning. In this scenario, the power of compounding is beneficial. Compounding is an excellent way to ensure a substantial amount to fund your Life Goals. It is a catalyst for generating a considerable corpus over the long term so you can get your Life Goals Done.

Investment plans also act as tax-planning tools, as many avenues help reduce tax liability. There are different types of investment plans, and by choosing the right one, you can invest according to your needs and grow your savings.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 7th July 2024
Modified on: 7th July 2024
Reading Time: 15 Mins
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The key to successful investment planning is by making the most out of compounding. Therefore, it is essential to understand the basics of the power of compounding. Let us look at how it works.

What is the Power of Compounding?

In simpler terms, compounding is the return earned on the already existing returns on your investment. The money obtained on the returns leads to the growth of funds. The power of compounding is advantageous if you have a long-term investment. Under a ULIP Policy, if you invest a small amount of money regularly, you may receive substantial returns over a long time through the power of compounding.

Let us understand the details with the help of an example of Riya and Priya. Riya makes Rs. 30,000 a month and spends lavishly on clothes, outing, etc. On the other hand, Priya, who also earns Rs. 30,000 per month is a conservative buyer, who saves Rs. 6,000 every month.

  Riya Priya
Monthly Savings in Rs. ` 6,000 ` 6,000
Assumed Rate of Returns (Yearly) 12% 12%
Investment period in years 20 30
Investment value at the end of the tenure ` 59,94,888 ` 2,11,79,483
Difference between Priya and Riya’s Investment Value ` 1,51,84,595

At the end of the investment time period, Riya falls behind in terms of savings by over Rs. 1.5 crore Now how will Riya accumulate the same amount as Priya? In order to catch up with Priya, Riya believes tripling her monthly investments is an excellent solution. Go through the following illustration below, which highlights Riya’s idea:

  Riya Priya
Monthly Savings in Rs. ` 18,000 ` 6,000
Assumed Rate of Returns (Yearly) 12% 12%
Investment period in years 20 30
Investment value at the end of the tenure ` 1,79,84,663 ` 2,11,79,483
Difference between Priya and Riya’s Investment Value ` 31,94,820

Despite tripling her investments, Riya falls short by approximately Rs. 32 Lakhs.

One of the biggest lesson learnt from Riya’s mistake is the significance of time. If Riya had invested at a younger age, she would have definitely reached the same amount of savings as Priya. In simple terms, the benefits of power of compounding is utilized to the fullest when you invest at an early stage of life.

How to enhance your investments?

1. Look for regular investment

As highlighted above, regular investing habit works towards the growth of your corpus provided you start early and stay invested for a long term.

2. Develop a disciplined spending habit

The financial needs of every individual are never-ending. Hence, it is necessary to make smarter investment decisions. Although savings are useful, the investment vehicle ensures the productive use of your hard-earned money.

It is important that you realise the power of compounding at an early age. It is also a great way to build a sizeable emergency fund. Therefore, invest in the right instrument to make the most out of the power of compounding. Always look out for an investment plan which takes in to account your risk appetite and financial goals and thereby helps you achieve your Life Goals.

Disclaimers:
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#Survey conducted by brand equity – Nielsen in March 2020

~Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility.

**Past performance is not indicative of future performance.

The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

@Term Insurance plan bought online directly from Bajaj Allianz Life Insurance has no commissions involved.

^^The Return of Premium amount is total of all the premiums received, exclusive of extra premium, rider premium and GST & /any other applicable tax levied, subject to changes in tax laws
Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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