Compound Interest Calculator

You can understand the calculation of compound interest with this simple example-

Say you have Rs.100000, and you are investing it for three years at 10% per annum compounded annually. For the first year, the interest will be Rs.10000 (100000*10%) on the principal Rs.100000. For the second year, the principal will be Rs.110000 (100000+ first-year interest 10000) and interest will be Rs.11000 (110000*10%). Continuing this pattern, in the third year, the principal will be Rs.121000, and interest will be Rs.12100. At maturity, you will get Rs.133100 as the maturity amount.

Since the example was for three years, it was easy to compute. But what if the tenure is longer? For this, the compound interest is calculated for any given interest and term using a formula. To calculate principal and interest, the compound interest calculator employs the compound interest formula. 

Compound Interest Formula is:
A (Maturity amount) = P (1 + r/n) ^ nt
In the above formula,
A= Maturity Amount
P= Principal amount
R= Annual interest rate
N= Compounding frequency (number of times the interest is compounded) in a year
T= Number of years.

(number of times the interest is compounded) in a year, and t means the number of years.

Let's refer to an example to understand the calculation in a better way. Suppose you invest Rs.10000 for five years in an investment offering a compound interest of 10% per annum. As per the formula, the maturity amount will be-

A= 10000 (1+0.1/5) ^ 5*1 = Rs.16105.1

Out of this, the portion of accumulated interest will be

Compound interest= Maturity amount – Principal = 16105.1- 10000 = Rs.6105.1

You can use this result to determine whether a particular investment is worthwhile, as well as for planning how you will spend the money in the future.

Understanding the significance of compounding frequency in Compound interest

Compounding frequency is the number of times the interest is added to the principal amount. It makes a significant difference to the total maturity value. A higher compounding frequency translates to a higher maturity value and vice-versa.

Here’s an example to understand the impact of the compounding frequency better. Suppose you have invested Rs 1 lakh in Fixed Deposit at an interest rate of 6% for a tenure of 3 years.

Consider the interest gains are calculated every quarter. This means your compounding frequency for a year is 4. Since you have invested funds for a tenure of 3 years, the compounding frequency will be multiplied. The total compounding frequency will be 12. Think about the returns you will reap on your principal amount that’s added with compound interest these many times. Your maturity value is definitely going to be higher.

You must note that a higher compounding frequency works only in your favour when you have lent money or made an investment. A higher compounding frequency when you have opted for a loan from the bank increases your interest liability. It increases the total cost of availing the loan, proving to be heavy on your pocket.

The compounding frequency is typically decided by the bank. It can be daily, weekly, monthly, quarterly, half-yearly, and yearly. You can enquire about your bank’s compounding frequency by reaching out to their customer representative or checking their website. The bank can change the interest rate offering and compounding frequency at any given time hence you must keep a close eye on their website.

Power of compounding

Compounding is probably the simplest yet the most effective way to grow your savings. You can benefit from the power of compounding by investing in various financial instruments like – Fixed Deposits, Mutual Funds, and retirement savings schemes such as Public Provident Fund (PPF).

For example, you choose to invest Rs 1 lakh in a Fixed Deposit (FD) at a compounding interest rate of 10% for a period of 5 years. The following is a tabular representation of the returns your FD will reap with time.

From the above table, you can successfully conclude that your investment greatly benefits from the power of compounding.

How to use the ICICI Direct Compound Interest calculator?

Using the ICICI Direct Compound Interest calculator is very easy. The online tool has an extremely simple user interface, making it possible for anyone to use the calculator.

Input the following data in the calculator:

• Principal Amount
• Rate of interest per annum
• Time period
• Compounding frequency

You can easily set the value of these variables using the slider. Move the slider to the left to decrease the input value and move it to the right to increase the value.

Once the calculator has processed all data it will provide accurate results within minutes. The calculator will give you an estimate of the total maturity amount. You will get a clear breakdown of the principal component and the total interest calculated. This will be accompanied by a graphical representation of the results in the form of a pie chart.

Difference between Simple Interest and Compound Interest

There are two methods of interest calculation – Simple Interest and Compound Interest. Both methods typically use the same set of variables however their formulas are different. The interest method adopted for your loan or investment calculation makes a significant difference. Hence, you should be aware of the difference between the two.

The following table highlights the major differences between Simple Interest and Compound Interest to make note of: