Compound Interest
Definition
Interest calculated on both the initial principal and the accumulated interest from previous periods. Often called 'interest on interest.' Over long periods, compound interest grows investments exponentially. Albert Einstein reportedly called it 'the eighth wonder of the world.'
Why is Compound Interest Important?
In the context of wealth creation and investing in India, Compound Interest is a fundamental concept. Whether you are investing in mutual funds via SIPs, fixed deposits, or retirement schemes like PPF and NPS, this metric helps evaluate potential returns and risks. The power of compounding and market volatility make it essential to track this indicator for any long-term portfolio.
Investors are encouraged to use specific investment calculators to project the future value of their corpus. Understanding this term enables better asset allocation, inflation protection, and consistent progress toward your ultimate financial goals.
What is Compound Interest?
Compound interest is interest calculated on both the initial principal AND the accumulated interest from previous periods. It is the basis of wealth creation and is famously called "the eighth wonder of the world" by Albert Einstein.
Formula
A = P × (1 + r/n)nt
| Variable | Meaning |
|---|---|
| A | Final amount |
| P | Principal (initial investment) |
| r | Annual interest rate (decimal) |
| n | Compounding frequency per year |
| t | Number of years |
Impact of Compounding Frequency
| Compounding | ₹1,00,000 at 10% for 10 years |
|---|---|
| Annual | ₹2,59,374 |
| Quarterly | ₹2,68,506 |
| Monthly | ₹2,70,704 |
| Daily | ₹2,71,791 |