1) What is Compound Interest?
Compound Interest is the interest which we earn on the invested principal plus the interest accrued. In simple words it is interest on interest. It reinvests the interest earned so that for the next period we earn interest on the principal amount plus the previous interest earned. Compound interest calculates the total interest earned for the investment compounded for the different tenures and frequency. It is also known as cumulative interest calculator.
2) What is the frequency of compounding?
It means number of times the interest is calculated and added to the investment value. The higher the frequency of compounding, better the returns will be. In Fixed Deposits the frequency of compounding is quarterly. For various instruments, it can be monthly, quarterly, half-yearly or annually depending on what one opts for.
3) How to calculate Compound Interest?
Compound interest calculation is very simple. Its just like simple interest where the principal amount changes every period. The formula for compound interest is:
V = P ((1+(r/n))^(nt)
P = Principal
R = Interest rate
N = Compounding frequency
T = Tenure
In this, the interest rate and the period are adjusted according to the compounding frequency. That is, if the compounding frequency is quarterly then we divide interest rate by 4 and multiply the tenure by 4.
4) What is Effective Annual Interest Rate?
It is the interest rate that is earned effectively on the investment amount annually. It is calculated by adjusting for the compounding frequency over a given time period. If compound interest is paid annually then the effective rate of interest and compound interest rate will be the same.
5) How to use Finology Compound Interest Calculator?
To calculate the compound interest earned on your lumpsum investment, you just need to enter your investment amount, interest rate, tenure and compounding frequency. It will give you the result, i.e., total amount invested, and the interest earned on it. Finology has a feature on it that you can also calculate the compound interest on your monthly savings/investment. Enter the frequency and amount of regular deposits and click on calculate. You will get the total return for your investments made with the effect of compounding. It also works as an annuity due calculator for your investments.
For example, if you want to deposit Rs 100 every month for 10 years and you want to earn quarterly interest on that of 10%, then enter 0 as your principal, 10% in interest rate, select quarterly on compounding frequency, enter 100 in regular investment and select monthly in deposit frequency. Click on calculate and you will know the amount you earned by your investment.