You must be familiar with financial products that claim you just need to invest a sum for a certain period and then see it double at the end of the term. While it is easy to think you have earned a return of 50%, it is not so. This is because your money gets compounded each year at a certain percentage of return.

E.g. if you are investing 10,000 for 10 years and are getting back 30,000 at the end of the term, your effective rate is 11.61% compounded annually.

This concept is known as the time value of money.

It says that money available currently is more valuable than the equivalent sum later on because of its earning potential.

So the Rs 30,000 available with you presently is far more than Rs 30,000 available to you in the future.

Why is this important? Whenever you have money, you can either choose to spend it or invest it. If you opt to invest it, you should ensure you earn much more than its present value. This is why it is important to keep your investments for long-term. This will help you earn better returns.