We already know that investing is essential to protecting our savings and making them grow, but… do we understand the power of compound interest?
What is compound interest?
When we talk about compound interest, we’re referring to the process by which the interest generated by an investment is added to the initial capital, which in turn generates more interest in the future. In short, your money grows exponentially over time. And best of all: you don’t need to do anything other than let your savings work for you!
How to take advantage of compound interest with a Mutual Fund?
A mutual fund is an excellent way to harness the power of compound interest. By investing this way, you diversify your investments with professionals and your risk of loss is lower.
How is compound interest calculated in a FCI?
Each time the fund generates returns, they are automatically reinvested back into the fund itself. This means:
The result is exponential growth in your savings over time.
Practical example of compound interest
Let’s imagine you invest $10,000 in a mutual fund that offers an annual return of 10%.
At the end of the first year, you’ll have earned $1,000 in interest, for a total of $11,000. Instead of withdrawing the interest, you leave it in the fund. At the end of the second year, you’ll earn $1,100 in interest, bringing your total investment to $12,100, and so on.
The key: patience and time
The true power of compound interest manifests itself over time. The longer you leave your savings invested, the faster they’ll grow. That’s why it’s important to be patient and resist the temptation to withdraw your savings prematurely.
Don’t forget your investor profile!
Before investing in a mutual fund, it’s essential to know your investor profile. This will help you choose the right fund for your goals and risk tolerance.
Investor profiles can be conservative, moderate, or aggressive, depending on their risk aversion and profitability expectations.
