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Compound Interest
See how money grows when interest earns interest.
Principal
₹1,00,000
Interest
₹1,59,374
Future Value
₹2,59,374
How it works
Simple interest is earned only on the principal. Compound interest is earned on principal + previously earned interest. Over decades this snowball effect (Einstein reportedly called it 'the eighth wonder of the world') creates non-linear growth.
The formula
A = P × (1 + r/n)^(n × t)- A
- Final amount
- P
- Principal
- r
- Annual rate as a decimal (e.g. 0.10 for 10%)
- n
- Compounding periods per year (12 monthly, 4 quarterly)
- t
- Time in years
Worked example
₹1,00,000 at 10% annually for 30 years → ~₹17.4 lakh. At 12% → ~₹30 lakh. Just 2% more nearly doubles the outcome — this is why fees matter.
Pro tips
- Rule of 72: years to double ≈ 72 ÷ interest rate. At 8%, money doubles every 9 years.
- Time in the market beats timing the market — the last 10 years of a 40-year investment produce more than the first 30 combined.
- Reinvest dividends and interest instead of spending them; that is what turns simple into compound.
Common mistakes
- Comparing simple-interest FDs with compound-interest mutual funds by 'rate' alone.
- Not accounting for inflation — real return = nominal return − inflation.
- Assuming linear growth in your head; the last decade always dominates.
Go deeper
Related lessons
Concepts to explore
Rule of 72Real vs nominal returnContinuous compounding (e^rt)
Results are illustrative and do not include taxes, fees, or slippage. This is educational content — not investment, tax, or legal advice.