Saving money helps your wealth grow arithmetically. Investing helps it multiply. However, investing over longer periods and ploughing back all investment income helps your wealth grow exponentially. That is what compounding is all about.
When you reinvest your investment income (interest, dividend) and let this income earn you more income, it is called compounding.
Study this table:
|Amount Invested in Rs.||1,50,000||1,50,000||1,50,000||1,50,000||1,50,000|
|Rate of Return (in %)||8||8||8||8||8|
|Interest Earned (Rs.)||72,037||1,78,668||3,36,510||5,70,153||9,16,003|
|Total Returns (Rs.)||2,22,037||3,28,668||4,86,510||7,20,153||10,66,003|
As is evident, over a longer term, compounding can return spectacular returns; it can make small amounts grow into a sizeable corpus.
There are various options available when it comes to investments like Fixed Deposits, Mutual Funds, ULIPs, etc. To profit from compounding, you need a long-term product; you also need to retain your investment income (and not withdraw it).
One such long term plan is ULIPs. ULIPs are market linked insurance products with an option to choose and switch between equity to debt funds not only helps you profit from compounding, it also provides you with a life cover and tax benefits to fulfil your wealth generation needs.