Compound interest is often referred to as "interest on interest" because it's the interest earned on both the initial principal amount and the accumulated interest from previous periods. It's like a snowball rolling downhill, getting bigger and bigger the further it goes.
A = P(1+r/n)^nt, where,
P denotes the principal amount
r is the rate of interest per annum
n is the number of times in a year the interest gets compounded
t is the number of years
After ,your investment of will grow to
Compound interest was called the ‘eighth wonder of the world’ by physicist Albert Einstein. There are various benefits of compound interest such as:
Compound interest can help you grow your investment exponentially. The addition of the accumulated interest in the principal amount for the calculation of interest magnifies the returns from the investment. The total corpus increases at a faster pace due to compounding.
Investment and deposit schemes that compound the initial investment provide the option to add money to the corpus at regular intervals. Regular additions help in speeding up the returns. The bigger the corpus, the higher is the interest income and the faster the investment grows.
By investing in a financial product that compounds the returns, one can achieve his/her financial goals at a faster pace. The more time the investment gets, the higher is the intensity of compounding.
There is a substantial difference between the returns generated by compound interest and simple interest. With the previous example, you were able to convert ₹10,000 to ₹14,641 in four years with the help of compound interest. Let us take the same tenor and interest rate and see the growth with simple interest.
The formula of simple interest is:
Here, P is the principal amount, R is the interest rate and T is the tenor.
The principal amount is ₹10,000, the interest rate is 10% per annum and the tenor is 4 years.
The simple interest will be 10,000 x 10 x 4/100 = 4,000
The amount in four years will be ₹14,000. It is worth remembering that the power of compounding increases with time.
The positive effect of compounding on investment is apparent. To take advantage of compound interest, one needs to focus on a few points.
The earlier you invest, the more time your money will get for compounding. Making regular investments is equally important. It helps in offsetting the impact of market fluctuations.
It is important to hold the investment for the long term as the power of compounding increases with time. The growth in the corpus is higher in the later years as the corpus is larger.
The higher the frequency of compounding, the higher will be the interest income.
One can reap rich benefits if one combines a higher rate of returns with compound interest. It is important to ensure that you choose investment options with a higher rate of return.
The compound interest formula calculators in India include options for:
Different investment options have different compounding intervals. When deciding between investment options, opt for the product that compounds more frequently. The shorter the compounding interval, the higher the growth will be. If there are more compounding intervals, the accumulated interest gets added to the principal amount more often, which results in a faster increase in the interest income.
Compound interest is an effective tool for wealth accumulation. However, one should keep these points in mind while using compound interest:
In the case of investments and deposits, compound interest can be a boon, but it becomes a bane in the case of loans. The longer you take to pay off a loan, the higher the interest burden. One should pay off a loan as early as possible because compound interest can be counterproductive.
Compound interest can help the principal amount grow exponentially. However, rather than watching an initial amount grow, one should focus on adding to the amount at regular intervals. The effect of compounding multiplies with additions to the initial corpus.
The amount of money you have saved for investment to gain from compound interest. It is the initial investment put in by an individual.
The amount that you add at regular intervals to the corpus is known as additions.
It is the annual interest rate that one earns on his/her investment.
It is the total duration of the investment.
The total value of the corpus in the future. It includes the initial investment, additions and the interest earned.
It's an online tool that helps you estimate how much your investment will grow over time when interest is earned not just on your principal amount, but also on the accumulated interest, leading to faster growth.
It simplifies complex calculations, allowing you to easily compare different investment options and plan your financial goals by understanding the power of long-term compounding.
Typically, you'll enter the principal amount, interest rate, compounding frequency (daily, monthly, etc.), and investment duration. Some calculators offer additional options like fees or taxes.
No, features and functionalities can vary. Choose a calculator that fits your needs, like advanced options for future inflation or specific investment types.
Reputable websites like ClearTax, Groww, or ET Money offer reliable calculators based on established financial formulas. Look for transparent information about their calculations and security practices.
Some calculators restrict input to longer terms for practical reasons, but the principle of compounding holds true for any time frame.