Compound Interest
Interest earned on your original money and on the interest it has already earned.
Detailed explanation
Simple interest pays only on the principal. Compounding pays on principal plus every rupee of interest already credited, so the base keeps growing. The effect is small in the first years and dramatic over long periods, which is why time in the market usually matters more than the exact rate.
Formula
A = P × (1 + r/n)^(n × t)
Example
₹1,00,000 at 12% p.a. compounded yearly becomes ₹1,00,000 × (1.12)^10 = ₹3,10,585 in 10 years. Simple interest would have given only ₹2,20,000.
Why it matters
Almost every long-term wealth idea — SIPs, PPF, retirement corpus — is compounding in disguise. Understanding it tells you why starting five years earlier often beats investing twice as much later.
Key points
- Growth is exponential, not linear.
- More frequent compounding (monthly vs yearly) raises the effective return slightly.
- Costs and taxes compound against you the same way.
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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.