Compounding is when you earn interest on your investment over a period of time, due to which you witness a growth on your earnings. Power of compounding enables your earnings to grow as your investments grow. Here's how you can understand this better. An interest is added on the initial investment (principal amount), this interest is the compound interest. Since the amount would be added to the initial investment and the new interest is calculated on this amount, the investment will continue to grow as this process would be consistent all throughout the investment period.
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Frequently Asked Questions
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How to use the Compound Interest Calculator?
If you’re wondering what kind of interest rate you need, you can check out our compound interest calculator. To start, you need to know how much money you have to invest upfront. Input this number in the given box. Next, if you’d like to add more money to your investment at regular intervals, you can choose to do so. Type in the amount you’d like to add and choose whether they will be monthly or annual payments. Next, decide how many years you’d like to invest for. Will you be making the regular payments for 5 years, 10 years or 25 years? You can either move the slider or simply input the number of years in the provided box. Once you’re done putting money in your investment, you can choose to remain invested for a longer time. This means that your interest will continue to compound and your money will grow over time. When selecting the number of years you’d like to stay invested for, it’s important that it’s more than the number of years that you want to invest for. Again, you can either move the slider or input the number directly in the provided box. If you have an understanding of how much money you would like at the end of the investment term, you can check the graph on the right-hand side of the page. As you change the rate of interest, either by shifting the slider or inputting numbers in the box, you’ll see how much money you can expect to earn at the end of your investment term. This will give you a clear indication of what is the best rate of interest for you to choose based on your investment capabilities, the amount of time you want to invest for and the amount of money you hope to have at the end of the investment.
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What Is Daily, Monthly & Early Compounding?
When it comes to choosing between simple and compound interest, compound interest will always win. But, there’s a way that you can make compound interest work harder for you. When you’re choosing an investment avenue that offers compound interest, you can also look at how often the interest is compounded. You can choose plans where the interest is accrued daily, monthly, six-monthly or annually. Compounding will always work best when the interval of compounding is short. We can understand this better with an example.
Let’s say Mr A has made an investment of INR 10,000 for just 3 years at a rate of 7%. If the interest is compounded annually, he’ll end up with INR 12,250 at the end of 3 years. If the compounding was done on a half-yearly basis, he would end up with INR 12,314 and if it was done on a monthly basis, he’d end up with INR 12,293.
You can also opt for daily interest accrual, which means your interest will be compounded every single day. So, every day you will earn a new amount based on the interest added to your initial investment. To maximise the benefit you can enjoy from a compound interest investment, it’s crucial that you start saving and investing as quickly as possible. The more time your money has to compound and grow, the more you will end up with.
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What Are Compound Interest Investments?
When it comes to investing, it’s always a good idea to choose an investment avenue that allows you to enjoy compounded interest. This is the most efficient way to maximise your returns and get the most out of your money. There are a number of investment opportunities today where you can benefit from plans that compound interest at regular intervals. At the most basic level, banks offer compound interest. The interest you earn every 6 months is added to your savings, and for the next six month, you can earn interest on the new amount. But this is hardly enough to help you achieve your financial goals. Mutual funds and Unit-Linked Insurance Plans (ULIPs) are two of the most common investments that utilise compound interest formulae to grow your money. Both investment avenues work in a similar fashion, with the main difference being that ULIPs offer the additional benefit of life cover. Compound interest investment plans are especially useful in planning your finances for your retirement.
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