Compound Interest Breakdown
What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, compounding means your money grows faster over time — because you earn interest on your interest. Albert Einstein reportedly called it the "eighth wonder of the world."
Compound Interest Formula
The formula is: A = P × (1 + r/n)^(n×t), where A is the total amount, P is the principal, r is the annual interest rate (as a decimal), n is the number of times interest compounds per year, and t is the time in years. Compound Interest = A − P.
Effect of Compounding Frequency
The more frequently interest compounds, the more you earn. For a ₹1,00,000 investment at 8% for 5 years: annual compounding gives ₹1,46,933; quarterly gives ₹1,48,451; and monthly gives ₹1,48,886. The difference becomes more significant with larger amounts and longer time periods.
Compound Interest in Indian Investments
In India, Fixed Deposits typically compound quarterly. Most savings account interest is calculated daily but credited monthly or quarterly. Mutual fund SIPs benefit from compounding over long horizons, which is why financial advisors recommend starting early. PPF interest is compounded annually, credited on March 31 each year.