Check How Compounding Effect Can create a Magic in growing your wealth

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A compound interest calculator is a tool that helps you calculate the interest earned on an investment or loan over time, when the interest is compounded. Compound interest is the interest earned not only on the initial amount invested (or borrowed), but also on the accumulated interest from previous periods.

The formula for calculating compound interest is: A = P * (1 + r/n) * (n*t)

where:

A is the total amount of money after t years

P is the principal amount (initial investment or loan amount)

r is the annual interest rate (as a decimal)

n is the number of times the interest is compounded per year

t is the number of years

A compound interest calculator allows you to input the values of P, r, n, and t, and calculates the total amount of money you will have after the specified time period, taking into account the interest earned through compounding. Some calculators may also show the amount of interest earned over the time period.

Compound interest is a type of interest calculation where the interest earned is added to the principal amount, resulting in an increased amount of interest earned in subsequent periods. In other words, compound interest is interest on interest.

When you invest or borrow money with compound interest, your interest is calculated not only on the original principal amount, but also on any accumulated interest from previous periods. As a result, the amount of interest earned or owed increases over time.

Compound interest works by adding the interest earned to the principal amount, resulting in an increased amount of interest earned in subsequent periods. This means that the interest earned in each period is calculated on the new principal amount, which includes both the original principal and any accumulated interest from previous periods.

There are several factors that can affect your compound interest returns, including:

- Interest rate: The interest rate is the most significant factor that affects your compound interest returns. Higher interest rates will result in higher returns, while lower interest rates will result in lower returns.
- Time: The longer your money stays invested, the more time it has to grow, and the more returns you will earn. Time is a crucial factor when it comes to compounding.
- Principal amount: The principal amount is the amount you initially invest. The more significant the principal amount, the higher the returns will be, as the interest is calculated on the principal.
- Frequency of compounding: The more frequently the interest is compounded, the more significant the impact on your returns will be. For example, daily compounding will result in higher returns than monthly compounding.
- Inflation: Inflation reduces the value of your money over time. If the interest rate on your investment is lower than the inflation rate, your returns will be eroded by inflation.
- Fees and taxes: Fees and taxes can eat into your returns, reducing the amount of money that is available for compounding.

It's important to consider all of these factors when choosing an investment, as they can have a significant impact on your compound interest returns over time.

- Assumed annual return shall be compounded monthly.
- Closing balances are gross of tax.
- Basis for selection of 13% CAGR as maximum returns has been derived from the mean of 10 years rolling return between 1st Jun’13 and 30th May’23 of benchmark (Nifty and Sensex).
- The above is for illustration purpose only. The amount, rate of return, etc. are assumed figures and used for explaining the concept. It should not be construed to be an indicator of past or future performance in any manner. Past performance may or may not be sustained in future and is not a guarantee of any future returns. MOAMC does not guarantee or assure returns.

Compound interest is a powerful tool for building wealth over time. It is a type of interest that is calculated on both the principal amount and any accumulated interest. This means that the interest earned in each period is added to the principal, and the new amount becomes the basis for calculating the interest in the next period.

For example, lets say you invest ₹10,000 in a fixed deposit account with a 7% annual interest rate, compounded quarterly.

After one year, your balance would be: = ₹10,000 * (1 + 0.07/4)*^(4*1) = ₹10,749.06

After two years, your balance would be: ₹10,000 * (1 + 0.07/4)*(4*2) = ₹11,544.06

And after three years, your balance would be: ₹10,000 * (1 + 0.07/4)*(4*3) = ₹12,403.28

As you can see, the principles behind compound interest are the same regardless of the currency used. The frequency of compounding and the interest rate will affect the amount of interest earned, just as they would with any other currency.

Compounding interest for a mutual fund is calculated based on the fund's net asset value (NAV) and the frequency at which the interest is compounded. The NAV is the price per share of the mutual fund, which represents the total value of the fund's assets divided by the number of outstanding shares.

The compounding effect continues in subsequent years, where the interest earned is calculated based on the increasing NAV. The frequency of compounding can vary depending on the mutual fund, with some funds compounding interest daily, weekly, or monthly.

It's important to note that the actual returns of a mutual fund can be influenced by various factors, including market conditions, management fees, and expenses, among others. Past performance is not a guarantee of future results, so it's important to carefully research and evaluate a mutual fund before making an investment.

Simple interest is calculated based only on the principal amount and the interest rate. For example, if you borrow INR 10,000 at a simple interest rate of 5%, you will owe INR 10,500 at the end of one year (INR 10,000 principal + INR 500 interest).

On the other hand, compound interest is calculated on the principal amount plus any accumulated interest that has already been earned. If you invest INR 10,000 at a compound interest rate of 5% per year, the interest earned in the first year would be INR 500. However, in the second year, interest would be calculated not only on the original principal amount of INR 10,000 but also on the INR 500 of interest earned in the first year. This would result in an interest payment of INR 525 in the second year, and so on.

In summary, simple interest is a fixed percentage of the principal amount, whereas compound interest is calculated on the principal amount plus any accumulated interest. Compound interest can result in higher returns over time, but it also requires a longer investment horizon to see the benefits.

Compound interest calculators provide accurate and quick calculations, aid in financial planning, save time, enable comparison of investment options, and facilitate goal setting. They are a valuable tool for making informed investment decisions and achieving financial goals.