What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Albert Einstein reportedly called it the "eighth wonder of the world" — and for good reason.
Simple vs Compound Interest
Simple interest: Interest only on principal. Compound interest: Interest on principal + accumulated interest. Over 20 years at 10%, ₹1 lakh grows to ₹3L (simple) vs ₹6.73L (compound).
The Rule of 72
Divide 72 by the interest rate to find how many years it takes to double your money. At 8%: 72/8 = 9 years. At 12%: 72/12 = 6 years. At 15%: 72/15 = 4.8 years.
Compounding Frequency Matters
- Annually: Interest added once a year
- Semi-annually: Twice a year (slightly better)
- Quarterly: Four times a year (banks use this for FDs)
- Monthly: 12 times (credit cards use this against you!)
- Daily: 365 times (savings accounts, liquid funds)
Real-World Examples
₹10,000/month SIP at 12% for 30 years: Invested = ₹36L, Corpus = ₹3.53 crore. That is the power of compounding — 97% of your corpus comes from compound growth, not your deposits!
How to Maximise Compounding
- Start investing as early as possible
- Be consistent — don't break the chain
- Reinvest dividends and interest
- Choose higher compounding frequency when possible