In life, you need to have both knowledge and experience to reap the most significant dividends. Without one, the other will always yield fewer results. Take the classic story of rice and chessboard, for instance. The story, where a sage after serving a king well asked the king to fill a chessboard by putting rice grains in each square. The count must start with one grain but should double the number in the next square.
‘How much rice could it take?’ thought the king and ordered the sage’s wish fulfilled. He couldn’t have been more wrong.
How Much Rice Will Fill the Chessboard?
The total number of rice grains needed to fill the chessboard would be 18,446,744,073,709,551,615. That is more than 18 quintillion rice grains with an approximate weight of 210 billion tonnes.
India currently produces an approximate 100 million tonnes of rice each year. At this rate of production, it will take the country more than 2,000 years to grow enough rice to pay the sage entirely.
Crux of the story?
“Doesn’t matter where you start, it’s how far you go and whether you withdraw anything along the way.”
What’s Compounding & How Does it Work?
Compounding works pretty much the same as the chessboard rice count. And there’s much to learn from this story if you wish to compound your wealth. In today’s day and age, who wouldn’t like to see their money grow?
In case of investments, compounding implies earning an “interest on interest.” In other words, compounding is similar to a multiplier effect because the interest earned on the initial capital also earns interest. As a result, the value of your investment grows exponentially rather than linearly.
The benefits of compounding are prominent in the long-term investment period. For instance, when you invest in a mutual fund, you earn interest on the principal amount. Furthermore, you reinvest your earnings or earned interest to receive additional units.
This way, you can earn a return on both dividends and the principal. This is essentially how compounding works: the principal amount is combined with the re-invested income, and your investment grows at an increased rate.
For example, an investment of Rs. 1,000 every year will grow up to Rs. 1,84,166 at an annual interest rate of 8 percent in 10 years. At the same rate of interest, you may earn up to Rs. 5,92,947 in 20 years. As you can see, when you invest for an extended period in a market-linked instrument such as a mutual fund, SIP or ULIP, you can easily maximize your earnings, courtesy compounding.
How Does ULIPs Yield Compounded Return?
ULIPs or Unit Linked Investment Plans offers you the combined benefits of investments and insurance under as a single plan. If you have long-term goals such as buying a house, a new car or sending your child abroad for higher education, ULIPs can help you maximize your savings through compounding, and you get considerably high returns on your capital.
This stands true even when you want to exit the ULIP after the initial lock-in period of five years, in comparison to retaining your money in a savings account or an FD, or not having invested the amount at all.
While a portion of your investment is used to provide life cover, the remaining amount is invested in a variety of equity and debt instruments as per your risk appetite and life goal. Essentially, you can reap the most benefits from the compounding effect by keeping your ULIP going for a longer time horizon.
You have the flexibility to switch between equity and debt fund options under ULIPS, which allows you to secure your investments against market volatilities. The equity investments under a ULIP are made at the prevailing Net Asset Value of the fund (NAV) of the funds. The NAV is the “price’ of each fund unit, which is calculated by dividing the sum of all investments made under the fund by the number of units issued.
With ULIPs, Compound Your Savings and Happiness Easily
Your wealth can easily grow into a substantial fund amount courtesy the benefits offered by compounding. However, you need to take advantage of the market-linked investments through ULIPs to achieve that.
While ULIP plans from reputable insurers such as Max Life Insurance help you maximize your investments through long-term equity market investments, they also help secure yourself and your loved ones against life’s contingencies with high ULIP returns and life cover.
Remember, if money is like the grain of rice and investment market is the chessboard, your approach and experience only limit you. Play smart and hold the innings together to achieve long term returns.