HaatBeatHow it's calculated
A = P × (1 + r ÷ k)^(k × t)
P is the deposit, r is the nominal annual rate, k is how many times a year interest is added, and t is the number of years. Interest earned is A − P.
Assumptions
- One deposit at the start, with no further deposits or withdrawals.
- The nominal rate stays the same for the whole period.
- Taxes, fees and inflation are not included.
Worked example
A deposit of 1 lakh rupees at 7% a year, compounded quarterly, grows to about 2 lakh rupees after 10 years. Compounded yearly, it grows to about 1.97 lakh rupees.
Questions
Why does more frequent compounding give more?
Interest added earlier starts earning interest sooner. The effect is small at low rates and grows with the rate and the number of years.
What is the effective annual rate?
It is the yearly growth once compounding is included. At 7% compounded quarterly it is about 7.19%.
Does this cover regular monthly deposits?
No. It covers one deposit. For a fixed amount every month, use the regular investment calculator.