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How does the compounding effect impact the value of long-term investments?

Curious about Compound interest

How does the compounding effect impact the value of long-term investments?

The compounding effect can have a significant impact on the value of longterm investments. When you allow your investments to compound over an extended period, the returns generated on your initial investment, along with any additional contributions or reinvested earnings, can generate further returns.

The key factor in the compounding effect is time. The longer your investment has to compound, the greater the potential for exponential growth in its value. This is due to the compounding of returns, where the earnings generated by your investment are reinvested, allowing them to generate additional earnings.

Here's an example to illustrate the impact of compounding on longterm investments:

Let's say you invest ₹1,00,000 in a longterm investment that earns an average annual return of 8%. If you reinvest the earnings and keep your investment for 20 years, the compounding effect can significantly increase its value. Assuming the returns are compounded annually, your investment could potentially grow to around ₹4,66,095.

As you can see from this example, the compounding effect amplifies the growth of your investment over time. The longer you stay invested and reinvest your earnings, the more pronounced the compounding effect becomes. This is why it's often advised to start investing early and maintain a longterm perspective to fully benefit from the power of compounding.

However, it's important to note that investment returns are subject to market fluctuations, and there are no guarantees of specific outcomes. It's advisable to diversify your investments, regularly review your portfolio, and consult with a financial advisor to ensure your investment strategy aligns with your goals and risk tolerance.

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