Compounding is an important concept in finance because it shows the role of reinvestments in building a substantial corpus. Compound interest is the interest calculated on the principal and previously accumulated interest.
This can be understood best with the 'snowball effect'. When a small snowball rolls down a slope, it accumulates more snow and ultimately becomes a large snowball. Similarly, compound interest leads to an exponential growth of your investment by accruing interest upon principal plus interest.
While you can calculate compound interest using complex formulas, it’s better to use our compound interest calculator. Simply enter the respective values here to get the result.
A compound interest calculator is an online financial tool which helps you to calculate returns on investments offering the benefit of compounding. It shows how your investments will grow with time, helping you grow your wealth.
You can use the Samco Compound Interest Calculator to calculate what you will receive at maturity which will help you to make better financial plans.
You have to insert three components in a compound interest calculator to view the results-principal amount, interest rate and investment tenure. Simply enter these details to get results instantly.
Follow these steps to use Samco’s compound interest calculator:
Step 1: Enter the principal amount.
Step 2: Enter interest rate as well as tenure for which you wish to calculate compound interest. You can type in or drag the slide to enter the values.
The online calculator will display the results onscreen.
This online financial tool is easy-to-use and provides accurate results in no time. Moreover, it is free to use.
You can use it for comparing the returns of different fixed-income investments and preparing an investment plan.
Here are some essential benefits of using our compound interest calculator:
As stated above, compound interest is simply interest on accumulated interest. It is calculated by multiplying your initial investment by the annual interest rate plus one raised to the number of years of investment.
You can find out the compound interest by subtracting the principal amount of your investment from its maturity amount. The formula to calculate the amount on maturity is as follows:
A = P(1 + r/n)^nt
P = Principal amount
A = Maturity Amount
r= Rate of interest
n = Number of times interest gets compounded annually
t = Number of years till maturity
This formula will give the total amount received after maturity.
Now, you can use the following formula to find out compound interest:
Compound interest (CI) = maturity amount – principal amount
Suppose you have invested ₹60,000 in a bond at an annual interest rate of 10% for 5 years. Returns generated by the investment in the first year will be ₹6000. For the second year, the interest will get calculated on (60,000 + 6000), i.e. ₹66,000 and it will accrue an interest amount of ₹6,600. Thus the cycle will continue.
Manual calculations are lengthy and time-consuming. Our compound interest calculator makes the task much easier.
Check the factors influencing compound interest returns:
But you can get the same effect by investing smaller sums regularly.
Here are the benefits of compounding on your investments:
It is not possible to state the exact time frame a person should remain invested in to maximise their returns. This is because people have different financial goals. Moreover, a person's ability to invest will not match that of another person. Thus, financial objectives and choice of investment should determine tenure.
Other than the above-mentioned factors, the longer one stays invested, the higher will be the returns. Experts recommend starting investments as soon as possible because it will give ample time to grow a substantial corpus.
An example will help to understand this better. Suppose, Amit invests ₹2,00,000 every year in an investment option which offers compound interest of 10% per annum. Let us see how much he will have at the end of 3 years.
This table will illustrate how the power of compounding increases the corpus across a timeframe:
|10% Interest Rate (per annum)
As we can see, Amit makes a total investment of ₹6,00,000. At the end of the 3rd year, its value increases to ₹7,28,200. The total amount of interest that he has earned stands at ₹1,28,200. As we can see, the longer he stays invested, the larger his profits become.
The table below shows the basic differences between compound interest and simple interest:
|Simple interest is earned on the principal amount only.
|Compound interest is earned on the principal as well as previously accrued interest.
|The total amount of interest earned is small. The growth of wealth is not so substantial.
|The total amount of interest earned is higher. Over time, the wealth accumulated can become substantial.
|Investors earn lower returns on principal compared to compound interest.
|Due to the benefit of compounding, people earn higher returns over simple interest.
|Principal does not change and remains the same during the entire tenure.
|Principal increases because interest gets compounded and added to the principal.
|It is not dependent upon the frequency of accumulation of interest.
|Compound interest depends on the frequency of interest accumulation. When the frequency increases, the amount increases.
Here are some useful tips to help you reap the benefits of the power of compounding on your investments:
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Compound interests provide you with the opportunity to maximise returns by earning interest on the principal amount plus interest accrued on it over time. The effects of compounding are more pronounced with longer investment tenures and larger investments. A compound interest calculator lets you figure out the total returns you can get from your investments.
To get the full benefit of compounding, it is important to track investments regularly. Our technology-driven advanced trading app helps to track how your investment is performing compared with a chosen benchmark index. The AI-based recommendations of our app will help improve your financial performance and ace the index.