Suppose you have started SIP in a mutual fund scheme, or have simply made a lump sum mutual fund investment. The mutual fund is performing well and you have started earning capital gains. These capital gains get reinvested in buying additional units of the fund, which increases your principal investment so that you can earn higher returns. The process keeps on continuing and eventually, the capital gains become much higher over a long period of time.
This happens through compounding, or by operation of compound interest. The best part is that you can also calculate compound interest effortlessly using a compound interest calculator. In this article, we will learn everything about compound interest and how to calculate compound interest easily using a compounding calculator.
What is Compound Interest?
We will start learning this with an example. Let us start with two cases- Ashok and Anurag.
Ashok has Rs 5 lakhs to invest, and he decides to invest it in a bank fixed deposit that offers an interest rate of 6% per annum. Ashok started the FD on January 1, 2022, so he will get 6% interest a year later on January 1, 2023.
6% of Rs 5,00,000 = Rs 30,000. He decides to withdraw the gains every year. So on January 1, 2023, he withdrew Rs 30,000 which left with the remaining principal of Rs 5,00,000 again. The same process will continue and Ashok will earn Rs 30,000 after a year and so on.
Now, Anurag also wants to invest Rs 5 lakhs in a fixed deposit which is offering a 6% rate of interest per annum, just like the case of Ashok. However, unlike Ashok, Anurag does not want to withdraw money every year. So he opts for a feature that allows him to reinvest the money earned through interest, in the same fixed deposit.
By doing this, Anurag has increased the principal amount for the second year from Rs 5 lakhs to Rs 5.3 lakhs. This allows Anurag to earn interest on Rs 5.3 lakhs in the second year, hence surpassing the interest earned by Ashok after the end of the second year. Anurag again reinvests the interest for the third year and keeps on doing this.
What Ashok and Anurag would have earned after 10 years?
Ashok will end up with a corpus of Rs 8 lakhs, of which 5 lakhs is his principal investment and 3 lakhs as interest.
Anurag will have Rs 8.95 lakhs, of which 5 lakhs is his principal investment and 3.95 lakhs as interest.
To compare, Anurag’s earnings will be 31.6% more than that of Ashok. How?
Because by choosing to reinvest the earnings again and along with principal investment, Anurag made his earnings compound and generate more returns. This type of interest is called compound interest. In simple words, compound interest is a type of interest that keeps on increasing periodically.
How to Calculate Compound Interest?
You can calculate compound interest using the compound interest calculator formula-
A = P(1 + r/100) ^ nt
- A = Total amount by the end of the period
- P = Principal amount from which compounding will start
- r = Rate of interest
- n = number of times the interest compounds in a year
- t = number of years
Let us take the example of Anurag from the above and see how we can find the compound interest using the formula.
P = 5,00,000
r = 6%
n = 1
t = 10
A = 500000(1 + 6/100)^10
A = Rs 8,95,424
You can also calculate compound interest without doing any manual calculations. Just open a compound interest calculator online and can calculate compound interest as many times you want without even paying anything.
What is a Compound Interest Calculator?
Compound interest calculator India or compounding calculator India is an online tool that allows you to calculate compound interest easily and quickly. It comes with a simple interface where you need to fill in the required details. Once done, the calculator shows you the compound interest instantly.
The Indian compound interest calculator requires the following inputs:
- Principal amount: The total amount of money invested initially
- Rate of interest: The interest rate applied on the principal amount
- Time period: Number of years the principal will compound
Based on the given inputs, the compound interest calculator will show you:
Total interest= Total amount of interest incurred during the period of investment
Final value of investment: The final value of the investment by adding principal amount and interest accrued.
Benefits of Using Compound Interest Calculator
- Using compound interest formula calculator, you can calculate compound interest on your investment within a few seconds. You just need to enter the principal amount, rate of interest, and the time period of investment. The calculator will show you how much you will earn from your investment.
- You can calculate compound interest as many times as you want. By simply changing the values, you can get results accordingly. This enables you to compare different investment plans so that you can optimize your returns efficiently.
- If you use INDmoney compound interest calculator, you do not have to pay anything or create any account. The calculator is completely free to use and enables hassle-free usage.
- The compound interest calculator shows accurate results which is not always the case when doing manual calculations using compound interest formulas.
Calculator compound interest comes in handy when you have to calculate compounding interest. It saves your time and effort from doing manual calculations using complicated formulas. By giving accurate figures, the compound interest calculator helps investors to have a better picture of their investment amount in the future. They can thus plan beforehand and make right financial decisions.
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Frequently Asked Questions
Is the value shown by compound interest calculator in Rupees?
Yes, the interest amount and the final investment amount shown in the compound interest calculator is in Rupees.
How to use compound interest calculator monthly?
If you earn monthly interest from an investment plan, you have to select the compounding frequency as ‘Monthly’ because the interest will compound 12 times in a year. By choosing monthly compounding, you can calculate the compound interest on your investment that gives you monthly returns.
What type of investment returns can be calculated using the compound interest calculator?
Any investment instrument that offers fixed interest rate and reinvests the accrued interest is suitable to be used in compound interest calculator for calculating returns.