How is Compound Interest Calculated? (The Formula)
The mathematical formula for compound interest is slightly more complex than simple interest because it accounts for the number of times interest is applied per year:
Daily vs Monthly vs Quarterly Compounding
The frequency of compounding (represented by 'n' in the formula) fundamentally changes your returns. The more frequently interest is added back to your principal, the faster your money grows.
- Annual Compounding (n=1): Interest is added once a year. Standard for many traditional bonds.
- Quarterly Compounding (n=4): Interest is added every 3 months. Most Indian Fixed Deposits (FDs) use this.
- Monthly Compounding (n=12): Interest is added every month. Most RDs and Mutual Fund projections follow this.
- Daily Compounding (n=365): Interest is added every single day. This is how most credit card interest and high-yield savings accounts work.
The Power of Compounding: A Real-World Example
If you invest ₹1 Lakh at 12% p.a. for 20 years:
- With Simple Interest, you would have **₹3.4 Lakhs**.
- With Annual Compounding, you would have **₹9.6 Lakhs**.
- With Monthly Compounding, you would have **₹10.8 Lakhs**.
- The 'gap' between simple and monthly compound interest is a staggering ₹7.4 Lakhs—purely due to the timing of interest credits.
Frequently Asked Questions
⚠️ Disclaimer
The figures provided by this calculator are estimates based on the inputs you provide and standard financial formulas. STOCKCALC.IN does not offer investment advice. Please consult a qualified financial advisor before making any investment decisions.