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Safest Investment With Compounding Power

Updated on June 19, 2013

Everyone needs to invest their hard-earned money for their future needs and old age. When investing, two factors are of paramount importance. Safety and rate of return. But if your investment is not safe, then even if the second factor, rate of return, is expected to be quite high, that is nothing to shout about. As such, the first , SAFETY of your investment, is THE MOST IMPORTANT factor. By rate of return, I mean how fast the initial investment amount grows.


Recurring Deposit

An investment that I have found out to be THE SAFEST and at the same time giving HIGH RATE OF RETURN is the RECURRING DEPOSIT . All banks in India give Recurring Deposits. I am sure banks in the USA, Europe and other countries also have similar deposits.

A Recurring Deposit can be defined as "one in which you pay into an account an agreed fixed sum of money over fixed intervals (usually every month) over a stipulated period." For example, one Mr.Smith takes a Recurring Deposit with XYZ Bank with the following condition. He shall have to remit $1000 every month for a period of ten years. The Bank shall pay him interest at the rate of 6% per annum (year) compounded every month. Now what is compounded interest.

Simple and Compound Interest

The real beauty of this investment is its COMPOUNDING POWER. To know about the compounding power, one must know what Compound Interest is. For an amount of 1000, Simple Interest at the rate of 6% per year is:

1000*6/100 = 60.

So if one is getting only Simple Interest, the invested Principal amount of 1000 will increase to 1060 (1000+60) after one year.

Now see what happens if one gets Compound Interest at the same rate of 6% per year, compounded monthly ( meaning every month).

Interest for 1 month: 1000*6/100 = 60. 60/12 = 5.

So after 1 month, the Principal Investment is now 1000+5 = 1005.

Now for the second month you will get Compound Interest, that is,

interest on 1005 and NOT 1000.

Interest for 2nd month: 1005*6/100 = 60.3. 60.3/12 = 5.03.

So after 2 months, the Principal Investment is now 1000+5+5.03 = 1010.03.

Now let us see what will be the total Compound Interest received (as per the above calculation) on 1000 after one year.

The Compound Interest after one year is 61.68.

And the Principal Amount is 1061.68 (1000+61.68) after one year.

61.68 and 60.00. The difference of 1.68 may seem small. But the real MAGIC of Compound Interest will be seen as the months and years go by. And you can see that magic in detail in the following table.


Table of a Recurring Deposit of 1000 Monthly for a Period of 10 Years at an Interest Rate of 6 % per Year. (Compounded Monthly)

Months (Years)
Monthly Deposit
Interest Received
Total Investment after Months (Years)
1
1000
5
1005
2
1000
10
2015
3
1000
15
3030
4
1000
20
4050
5
1000
25
5076
6
1000
30
6106
7
1000
36
7141
8
1000
41
8182
9
1000
46
9228
10
1000
51
10279
11
1000
56
11336
12
1000
62
12397
13 to 23
 
 
 
24 ( 2 yrs:)
1000 each
127
25559
36 ( 3 yrs:)
1000 each
197
39533
48 ( 4 yrs:)
1000 each
270
54368
60 ( 5 yrs:)
1000 each
349
70119
72 ( 6 yrs:)
1000 each
432
86841
84 ( 7 yrs:)
1000 each
520
104594
96 ( 8 yrs:)
1000 each
614
123443
108 ( 9 yrs:)
1000 each
714
143454
120 ( 10 yrs:)
1000 each
819
164299

Evaluation of the Table

The actual amount invested is 1000*120 = 120,000. This has grown to 164,699. This is an increase of 44,699. Remember that this appreciation has been made on an average rate of interest of only 6 % . We in India can get up to 9 % interest. Just to give one a picture, if the rate of interest is 9 %, the final amount would have been 194,966; an appreciation of 74,966. Interest rates vary country to country, and even among banks.

What I am trying to show is that the growth on investment is quite good. Another very important aspect of a Recurring Deposit investment is that there is absolutely no downside to the Principal amount. If you are investing in company stocks, you may get a big return, but you can easily get even your principal investment eroded or even wiped out.

How Safe is a Recurring Deposit ?

Finally how safe is a Recurring Deposit. If you want the safest investment, go for government securities. But the rate of return will be very low. Then there are Post Office Savings Bank deposits. We in India can open Recurring Deposits both in Post Offices and Banks. Only difference is that the rates in Post Office deposits may be slightly lower. But as the P.O deposits are guaranteed by the federal (central) government, you can be doubly sure.

Bank deposits up to a limit (it is 100,000 Indian Rupees) are also guaranteed by a government agency in most countries. Even otherwise, any government in a proper or decent country will always look after the safety of the depositors in all banks.

Conclusion

Recurring Deposit is worth considering for all those who are looking for a safe and sound investment. For getting better returns, one should start early and take a long period deposit. Compound Interest starts working more magic as the period of investment increases.

Comments

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    • FSlovenec profile image

      Frank Slovenec 5 years ago from San Francisco, CA

      Re-occuring deposit in the Bible Study and Prayer has the greatest return it will compound wildly and the rewards are an abundant life!

    • colombostock profile image

      colombostock 5 years ago from Colombo Sri Lanka

      Useful information. Thanks for sharing!

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