10 Best Compounding Interest Investment Schemes in India in 2024

If you want to increase your money, consider compound interest investments. These investments are important because they can generate exponential growth in your wealth over time. Multiple options are available in India, such as fixed deposits, mutual funds, and more.

This article explains where to invest, the options available, and the benefits of compound interest.

Compound interest calculates interest on the principal (the original sum of money) and the interest gained over time. It is a win-win situation of getting interest over interest. The principal amount increases through the interest gained over time. The subsequent interest received is based on the bigger sum.

Unlike simple interest, whose compounding effect increases investment or loan over time, it is quickly calculated on the principal amount only. Compared to compound interest, whose principal works behind building debt and money growth over time, it can be used for saving accounts, loans and investments.

Read More: Compound Interest Calculator

1. Low-Risk Options

• Savings Accounts: These are the most basic. Interest on the savings account will be low but your money remains safe. 
• Certificates of Deposit (CDs): You deposits your money for a fixed time, suppose 6 months, in return you get more interest than a savings account.
• Money Market Accounts: These are quite similar to savings accounts, but they let you write cheques and pay slightly higher interest often.

2. Medium-Risk Options

• Fixed Deposits: Unlike regular saving accounts, often pay higher interest but it is offered by financial institutions and banks.
• Public Provident Fund (PPF): Known for its steady returns and tax benefits, this investment option is backed by the Indian government.

3. High-Risk Options

• Equity Mutual Funds: These are risky investments in stocks but have high potential returns with time.
• Equity Linked Savings Schemes (ELSS): They have tax benefits as these are invested in stocks via mutual funds.

1. Public Provident Fund (PPF)

PPF is a long-term investment option with competitive interest and return rates. These investments are considered safe and offer tax benefits, making them a preferred choice for low-risk investors looking for long-term savings and tax-saving options.

• How/Where to Invest: You must deposit into your PPF account with an authorised bank or post office at least once every 15 years. You require a minimum deposit of ₹500 and a maximum deposit of ₹1.5 lakhs to open a PPF account. One has two payment options: a single large payment or 12 smaller payments.
• Risk: PPF programs are provided and supported by the government. Therefore, it offers security and a guarantee for your deposits.
• Contribution Compliance: As per current rules, PPF has a minimum annual contribution requirement of ₹500 and a maximum limit of ₹1.5 lakhs. Monitoring compliance with these limitations on contributions is a crucial KPI for ensuring that the money being invested is by the laws and regulations.
• Withdrawal: You can withdraw funds from your PPF account after five years of regular contributions. You must collect Form-C (PPF Withdrawal Form) from your chosen bank, fill it out, and send it to the bank along with a withdrawal request to do so.

2. Fixed Deposits

A fixed deposit is a kind of savings cum investment instrument with a definite time and interest for a certain amount deposited. Here, the rates offered by various financial institutions vary. You can open an account offline or online. Here are its key features:

• How/Where to Invest: You can invest in fixed deposits for a specified period or tenure. Options for the deposit period often range from a few months to many years. Generally, the minimum investment amount for a regular bank FD is ₹5,000.
• Risk: Fixed deposits are investment instruments provided by banks, and their interest rates are generally higher than those of a regular savings account.
• Contribution Compliance: Contribution compliance is not applicable to fixed deposits since, unlike PPF, fixed deposits are a one-time investment made when opening the deposit account.
• Tax Benefits: Fixed deposits offer tax benefits, with investments up to ₹1.5 lakhs per year being eligible for deduction under Section 80C of the Income Tax Act.
• Withdrawal: Fixed deposits allow for early withdrawal. However, they have a penalty or charge for premature withdrawal, varying between 0.5% to 1%.

3. Life Insurance Savings Plans

A savings plan is a type of insurance that allows policyholders to save money and build up finances for the future. It also provides protection for the policyholder, safeguarding their family's financial future.

• How/Where to Invest: While there is no upper limit on the amount you can invest, the minimum investment is ₹500. Long-term investing helps you to get free bonus additions to increase the value of your money in the plan.
• Risk: The risks are lower than those of other investments, as you receive guaranteed returns as a maturity benefit. However, some risk is associated with these plans, depending on several factors, including the specific type of savings plan, the insurance company offering the plan, and your financial situation and goals.
• Contribution Compliance: These plans typically require regular premium payments, such as monthly, quarterly, half-yearly, or yearly. Moreover, you must also comply with the premium amount and policy renewals.
• Tax Benefits: The premiums paid towards many life insurance plans may be eligible for tax deduction under Section 80C of the Income Tax Act up to a certain limit. Furthermore, the maturity proceeds or death benefit from ULIPs may be tax-exempt under Section 10(10D) of the Income Tax Act, subject to certain conditions.
• Withdrawal: You can partially withdraw from your savings insurance plan in case of an emergency. As per Section 10(10D) of the Income Tax Act, if your premium payable is not more than 10% of the sum assured, your partial withdrawal amount will be exempt from taxation. However, if your policy was purchased before April 1, 2012, and the premium is at most 20% of the sum assured, your withdrawal will be tax-free.

4. National Savings Certificate (NSC)

NSC is a government-backed investment scheme offered by post offices. It's known for its safety and tax benefits. Your money grows steadily over a fixed period, making it a suitable option for risk-averse investors seeking long-term returns.

• How to Invest: You can purchase an NSC from a post office or select banks. It's available in two forms: physical certificates and electronic NSCs. The minimum investment amount is typically low, making it accessible to most investors. The government sets a maximum annual investment limit in NSC to claim tax benefits.
• Risk: NSC is considered a very low-risk investment. It's backed by the government of India, which means your investment is relatively secure. The interest rate on NSC is fixed, so you know exactly what return you will earn.
• Tax Benefits: One of the main advantages of NSC is its tax benefits. Investments in NSC qualify for tax deductions under Section 80C of the Income Tax Act. This means you can reduce your taxable income by the amount you invest in NSC. However, the interest earned on NSC is taxable in the year of maturity.
• Withdrawal: NSC has a fixed maturity period, typically five years. However, withdrawing your money before the maturity date will result in a penalty. If you need access to your funds before maturity, NSC might not be your best option.

5. Debt Mutual Funds

Debt mutual funds invest in fixed-income securities like government bonds and corporate debentures. These funds offer the potential for regular income and capital appreciation, making them suitable for investors seeking moderate returns with lower risk.

• How to Invest: You can invest in mutual funds in debt through mutual fund houses or registered investment advisors (RIAs). These funds pool money from multiple investors in debt securities like government bonds, corporate bonds, and other debt instruments.
• Risk: Debt mutual funds are typically viewed as less risky than equity mutual funds, but they are not completely risk-free. The value of your investment can fluctuate due to changes in interest rates, issuers' credit risk, and market conditions. However, investing in a diversified debt fund can spread your risk across different securities.
• Tax Benefits: While there is no direct tax deduction for investing in mutual funds with debt, you can benefit from tax advantages on the returns. Long-term capital gains (holding period of more than three years) are taxed at a concessional rate with indexation benefits, which helps reduce the tax liability. Short-term capital gains (holding period of three years or less) are taxed as per your income tax slab.
• Withdrawal: You can redeem your investment in a debt mutual fund anytime. However, some funds may charge an exit load for redemptions before a specified period. Additionally, the fund's net asset value (NAV) may fluctuate, affecting the amount you receive when you redeem your units.

6. Unit Linked Insurance Plans (ULIPs) with Debt Fund Investment

ULIPs combine insurance coverage with investment options. You get a mix of protection and growth by choosing debt funds as your investment option. It's a suitable choice for those seeking insurance and investment under one plan, with a focus on capital preservation.

• How to Invest: ULIPs are insurance cum investment products offered by insurance companies. A portion of your premium is invested in underlying funds, including debt funds.
• Risk: ULIPs with debt fund investments are generally considered less risky than those with equity fund investments. However, the risk level can vary depending on the specific debt fund. The insurance component provides a life cover, but the investment portion is subject to market risks.
• Tax Benefits: ULIPs offer tax benefits on the premium and the maturity proceeds. Premiums paid towards the ULIP qualify for tax deductions under Section 80C of the Income Tax Act. The death benefit is generally tax-free, and the maturity proceeds are tax-free under certain conditions (like holding the policy for more than five years).
• Withdrawal: ULIPs typically have a lock-in period of five years. After the lock-in period, partial withdrawals are allowed but may incur charges. You can withdraw the full amount at maturity. The value of your investment will depend on the performance of the underlying debt fund.

7. Equity-Linked Savings Scheme (ELSS)

ELSS is a form of mutual fund that invests largely in equities or stock markets.

• How/Where to Invest: The most convenient option for investing in ELSS is to open an Online Investment Services Account. You have two investing options: one lump sum payment or through a SIP (Systematic Investment Plan). A SIP can start with a minimum of ₹500 and has no higher limit.
• Risk: ELSS are high-risk, high-return investments that invest in market-linked instruments and depend on the performance of underlying securities. So, they do not provide guaranteed returns.
• Expense Ratio: The expense ratio is the percentage of assets deducted by the fund house to cover the expenses of managing the fund. A lower expense ratio indicates that a higher portion of the returns is being passed on to the investors, potentially resulting in higher net returns. Comparing the expense ratio of an ELSS fund with its peers can help assess the fund's cost-efficiency.
• Withdrawal: When the lock-in period expires after three years, you can redeem your ELSS units all at once. You can redeem ELSS investments online or offline.

8. Equity Mutual Funds

In equity mutual funds, your money is invested in equities of various firms. These are also known as growth funds. It offers higher returns than fixed-income investments and debt funds, which is advantageous.

• How/Where to Invest: To invest in equity mutual funds, you can create a Demat account with a broker company. Additionally, with a minimum investment of ₹100, one can participate in a mutual fund SIP.
• Risk: These funds may have liquidity risks. Therefore, it could be easier for you to redeem your assets if you suffer a loss. There is also considerable risk based on market conditions and the company's success.
• Tax Benefits: You can save taxes by investing in equity mutual funds, which allow you to claim tax advantages under Section 80C.
• Diversified Portfolio: You may invest a small amount of money in equities mutual funds, turn a profit, and diversify your portfolio's companies.
• Withdrawal: Equity mutual funds are mostly open-ended, meaning you can withdraw them at any given time without a penalty. However, investments such as ELSS have a lock-in for 3 years, which may be useful for long-term investors.

9. National Pension Scheme (NPS)

The National Pension System (NPS) is a long-term retirement savings scheme designed to provide a steady income after retirement. It's a market-linked investment option, meaning your returns are influenced by the performance of the financial markets.

• How/Where to Invest: You can open an NPS account with banks, post offices, and other financial institutions. You contribute regularly, choosing from various investment options like equity, corporate bonds, and government securities. The minimum contribution amount is flexible.
• Risk: NPS involves investment in equities, which carries market risk. However, diversification across asset classes helps manage risk. The overall risk profile depends on the investment options you choose.
• Contribution Compliance: Contributions to your NPS account qualify for tax deductions under Sections 80C and 80CCD of the Income Tax Act, which helps reduce your taxable income.
• Tax Benefits: Apart from tax deductions on contributions, you can also claim tax benefits on withdrawals under certain conditions. A portion of your withdrawal is tax-free, and the remaining amount is taxed as per your income tax slab.
• Withdrawal: At retirement, you must use a minimum of 40% of your accumulated corpus to buy an annuity, which provides a regular pension. The remaining amount can be withdrawn as a lump sum. There are also options for phased withdrawals.

10. Unit-Linked Insurance Plans (ULIPs) with Equity Fund Investment

ULIPs are insurance-cum-investment products that offer both life cover and investment growth. By investing in equity funds, you aim to capitalize on the potential for higher returns.

• How/Where to Invest: You purchase a ULIP from an insurance company. A portion of your premium is invested in equity funds, which professional fund managers manage.
• Risk: Equity funds are subject to market volatility, making ULIPs with equity funds relatively high-risk compared to debt-based ULIPs. However, they offer the potential for significant returns over the long term.
• Contribution Compliance: Premiums paid towards the ULIP qualify for tax deductions under Section 80C of the Income Tax Act.
• Tax Benefits: ULIPs offer tax benefits on both premiums and maturity proceeds. The death benefit is generally tax-free, and the maturity proceeds may also be tax-free if certain conditions are met.
• Withdrawal: ULIPs typically have a lock-in period of five years. After that, you can make partial withdrawals, subject to charges. The full amount can be withdrawn at maturity. Your investment's final value depends on the equity funds' performance.

The main features of compound interest investment options are as follows:

• Reinvestment of Interest: Compound interest investment options typically allow for the reinvestment of interest earned. This means that the interest earned on your initial investment is reinvested into your funds, allowing it to earn additional interest in subsequent periods. This compounding effect can result in exponential growth of your investment over time.
• Higher Returns Over Time: Due to the compounding effect, compound interest investment options can generate higher returns over time than simple interest investments. As the interest earned is reinvested, it generates additional interest, leading to the exponential growth of your investment over time.
• Long-Term Investment Horizon: Compound interest works best when investments are held for a long period, allowing the compounding effect to work its magic. Compound interest investment options are often designed for long-term investment horizons, such as retirement funds or long-term savings plans, where the power of compounding can be fully realized.
• The Flexibility of Investment Amount: Compound interest investment options may offer flexibility in the investment amount, allowing investors to start with small amounts and gradually increase their investments over time. This can make it accessible to many investors and allow regular investments to take advantage of the compounding effect.
• Diversified Investment Portfolios: Compound interest investment options may offer diversified investment portfolios, which can help spread the risk across different asset classes, sectors, or geographies. Diversification can lower the overall risk of the investment and enhance long-term returns.
• Potential for Tax Benefits: Many compound interest investment options offer tax benefits, either through deductions on the initial investment or tax-deferred growth. These benefits can significantly enhance the overall returns.
• Professional Management: Some compound interest investment options, such as mutual funds or managed investment accounts, provide professional management. This means experienced investors handle investment decisions, potentially leading to better performance.
• Access to a Variety of Asset Classes: Certain compound interest investment options, like mutual funds and exchange-traded funds (ETFs), allow investors to access a diversified range of asset classes, including stocks, bonds, and real estate. This diversification can help manage risk and improve overall returns.
• Potential for Liquidity: While some compound interest investments restrict withdrawals, others offer varying degrees of liquidity. You can access your funds when needed, although early withdrawals may incur penalties.
• Automatic Reinvestment: Many compound interest investment options automatically reinvest dividends, interest, or capital gains. This feature simplifies the process of maximizing the compounding effect.

Some of the major benefits you can get from Compound Interest Investment are as follows:

• Multiplies Your Profits: It maximizes your returns by growing exponentially over time, resulting in higher returns than simple interest.
• You Can Start Small: Compound interest investments can be started with a small initial investment, making them accessible for investors with limited funds.
• Diversification of Opportunities: These provide opportunities for diversification, which means spreading your investment across different asset classes, such as stocks, bonds, insurance, etc. Diversification can help mitigate risks by lowering the impact of poor performance in one investment on your portfolio.
• Long-Term Wealth Creation: Compound interest is a powerful tool for building wealth over the long term. By consistently investing and reinvesting earnings, you can create a substantial financial cushion for retirement or other major life goals.
• Hedging Against Inflation: While not a guaranteed protection, compound interest can help offset the effects of inflation. If your investment returns exceed the inflation rate, your purchasing power is maintained or increased.
• Potential for Tax-Advantaged Growth: Many compound interest investment options offer tax advantages, such as tax-deferred growth or tax-free withdrawals. These benefits can significantly enhance your overall returns.

Some of the risks involved with Compound Interest Investments are:

• Suitable for Long-Term Investors Only: It is most advantageous over the long term as it needs a longer time horizon to fully benefit from the compounding effect, which may not be suitable for short-term financial goals.
• May Result in a Heavy Financial Burden: If you are not careful with your investments, the compounding effect can also work against you, resulting in a significant financial burden if you accumulate debt or incur high interest rates.
• Inflation Risk: Inflation Risk: Inflation lowers the value of money over time, and compound interest investments may not always keep up.
• Market Volatility: Many compound interest investment options, especially those involving stocks or bonds, are subject to market fluctuations. This can lead to temporary losses in the value of your investment.
• Investment Risk: Choosing the wrong investment can lead to losses, even with the power of compounding. It's essential to conduct thorough research or consult with a financial advisor before investing.

This article discusses how compound interest is a powerful tool for investors in India and various options for investing in compound interest, such as fixed deposits, public provident funds, equity investments, etc. These options offer tax benefits, diversification, and the potential for higher returns. 

However, they also come with risks such as inflation risks, market risks, or liquidity risks. So, you must thoroughly research these options to make informed investment decisions.