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. 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.

## What is Compound Interest?

Compound interest is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods. Essentially, it's interest on interest, which can significantly increase your investment over time.

We will start learning this with an example. Let us start with two cases- Ashok and Anurag.

Ashok has **₹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 ₹5,00,000 = **₹30,000**. He decides to withdraw the gains every year. So on January 1, 2023, he withdrew ₹30,000 which left with the remaining principal of **₹5,00,000 **again. The same process will continue and Ashok will earn ₹30,000 after a year and so on.

Now, Anurag also wants to invest ₹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 ₹**5 lakhs to ₹5.3 lakhs**. This allows Anurag to earn interest on ₹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 ₹**8 lakhs**, of which 5 lakhs is his principal investment and **3 lakhs as interest**.

Anurag will have ₹**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**

Where,

A = the amount of money accumulated after n years, including interest.

P = the principal amount (the initial amount of money).

r = annual interest rate (decimal).

n = number of times interest is compounded per year.

t = number of years the money is invested or borrowed for.

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 = ₹**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.

## Importance of Compound Interest

The power of compounding lies in its ability to grow your money exponentially over time. Here are some reasons why compound interest is important:

**Boosts Savings:** Even small amounts of money can grow significantly over time due to compounding.**Encourages Long-term Investing:** The longer you keep your money invested, the more you benefit from compounding.**Helps in Financial Planning:** Understanding compound interest helps in planning for long-term goals like retirement, education, or buying a home.**Maximizes Returns:** It can maximize returns on investments such as fixed deposits, mutual funds, and other savings schemes.

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.

## 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.

#### What is the difference between simple interest and compound interest?

Simple interest is calculated only on the principal amount, whereas compound interest is calculated on the principal amount plus any accumulated interest.

Understanding these basics about compound interest and using the right tools can greatly enhance your financial planning and investment strategy.

#### Why is compound interest important?

Compound interest is important because it helps grow your money exponentially over time, encourages long-term investing, and aids in financial planning.