Compound Interest Calculator

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

Compound interest was called the ‘eighth wonder of the world’ by physicist Albert Einstein. There are various benefits of compound interest such as:

• Exponential Growth

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.

• Regular Additions

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.

• Faster Achievement of Financial Goals

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:

 

P*R*T/100

 

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 compound interest formula calculators in India include options for:

• Daily compounding

• Monthly compounding

• Quarterly compounding

• Half-yearly compounding

• Yearly compounding

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:

• Pay-off Loans Early

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.

• Focus on Additions

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.

• ULIPs

• Mutual Funds

• Home Loan