Compound Interest

Compound Interest is the interest calculated on both the initial principal and the accumulated interest from previous periods.

It is often called "interest on interest" and is the mechanism that makes investments grow exponentially over time. Albert Einstein allegedly called compound interest the eighth wonder of the world, and for good reason — it has the power to turn small, regular investments into significant wealth over long periods. What is Compound Interest? Let's say you invest ₹1 lakh in a fixed deposit at 7% per annum for 3 years. With simple interest, you would earn ₹7,000 each year (₹1 lakh × 7%) = ₹21,000 total interest. With compound interest, in year 1 you earn ₹7,000 on the ₹1 lakh. In year 2, you earn 7% on ₹1,07,000 (principal + year 1 interest) = ₹7,490. In year 3, you earn 7% on ₹1,14,490 = ₹8,014. Total compound interest = ₹22,504 vs ₹21,000 simple interest. The difference between simple and compound interest grows dramatically with time. ₹1 lakh at 7% compound for 20 years grows to ₹3.87 lakhs. At simple interest it would be ₹2.4 lakhs. The ₹1.47 lakh difference is entirely the power of compounding. For 30 years, compound interest grows ₹1 lakh to ₹7.61 lakhs vs ₹3.1 lakhs simple — more than double the difference. In India, compound interest is relevant everywhere — fixed deposits (compounded quarterly or half-yearly), Public Provident Fund (PPF) contributions, mutual fund returns, and even theReturns on a Recurring Deposit. The frequency of compounding matters: annual compounding vs quarterly compounding on the same rate can produce meaningfully different results over 10+ years. The Rule of 72 is a quick way to estimate how long it takes for an investment to double at a given compound interest rate. Divide 72 by the annual interest rate. At 7% per annum, your money doubles in approximately 72/7 = 10.3 years. At 12%, it doubles in 6 years. This is useful for setting financial goals and understanding the realistic expectations from different investment instruments. For long-term wealth creation in India, equity mutual funds have historically delivered 12% to 15% compounded returns over 20+ year periods. ₹5,000 invested monthly in an equity fund averaging 12% per annum for 20 years grows to approximately ₹49.98 lakhs, of which your total contribution is only ₹12 lakhs. The remaining ₹37.98 lakhs is pure compound interest on your disciplined monthly investing.