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Business News/ Money / Personal Finance/  Mukhya Mantri Ladli Behna Yojana: How does compounding turn a small monthly investment into a decent corpus?

Mukhya Mantri Ladli Behna Yojana: How does compounding turn a small monthly investment into a decent corpus?

A minimal investment of 1000 every month can help one accumulate a decent corpus over a period, provided the investment is continued for a prolonged period. Beyond the investment amount and interest rate, it is the investment tenure that matters most when gaining from the compounding effect.

How the Magic of Compounding can help one achieve financial goals?

Are you familiar with the “Mukhya Mantri Ladli Behna Yojana" initiated by the Madhya Pradesh government in January 2023? This program aims to provide financial empowerment to underprivileged girls and women in the state, offering a monthly grant of 1000. This translates to an annual sum of 12,000 deposited into the bank accounts of eligible women aged 23-60 years old.

While some might perceive the amount as modest, have you considered the potential impact of systematic and regular investments? These small earnings, when invested consistently, have the capacity to help women amass a substantial corpus for their future.

Assume that someone opts for a straightforward investment avenue such as the Public Provident Fund (PPF), catering to investors with a low-risk tolerance who are satisfied with consistent, fixed returns. The PPF scheme has a maturity period of 15 years. However, even after this 15-year duration, numerous benefits continue to be accessible.

The following illustration explains how much a woman aged 23 years old will gain if she invests the monthly grant without fail in a PPF account for 15 years.

Monthly Investment: 1000

Interest Rate: 7.1%

Investment Tenure: 15 years

The investment would translate to

Total Invested Amount: 1.8 lakh

Interest Earned: 1.36 lakh

Maturity Amount: 3.16 lakhs

Assume that the aforementioned investor does not redeem the amount after 15 years but decides to continue with her investment for another 15 years.

The investment would translate to

Total Invested Amount: 3.6 lakhs

Interest Earned: 8.39 lakhs

Maturity Amount: 11.99 lakhs

This sum proves to be significant, especially when considering how financially disadvantaged women reliant on government assistance can turn to investing in schemes sponsored by the government to safeguard their financial well-being.

The woman has the option to initiate a PPF account at either a government or private bank, or alternatively, she can choose to open an account at any post office in her city, thus, enabling the ease of investment.

Enhancing her financial literacy could motivate her to explore mutual funds and consider investing in one. Contrary to the misconception that market-linked investments are solely for the affluent, these women can initiate investments in an index fund or a large-cap fund, sustaining their contributions for approximately two to three decades.

The following illustration explains how a 23-year-old investor stands to gain with long-term investments in any mutual fund spanning over three decades.

Amount Invested: 3.6 lakhs

Expected Rate of Return: 12%

Investment Tenure: 30 years

Wealth Gain: 31,69,914

Earnings Expected: 35,29,914

It might be a source of skepticism whether it’s feasible to amass a substantial corpus through monthly investments as modest as 1000. What often goes unnoticed is that individuals can commence their investment journey with an even lower amount, such as 100. It’s not just financial constraints but also behavioural biases that deter many from putting their money into investments.

The compounding mechanism guarantees that you not only earn interest on your initial invested amount but also accumulate interest on the returns. For those unfamiliar, compounding is a mathematical process capable of increasing your potential earnings from an investment. The compounding process operates continuously, and it is often emphasized that the greatest advantages of compounding are realized over an extended period. Financially literate people rely on this compounding effect to amass the much-desired corpus for their post-retirement period or achieve their financial goals early in life.

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