Compound Interest Explained — Why Einstein Called It the Eighth Wonder

Compound interest is interest earned on interest. It sounds simple — and it is — but the long-term consequences are anything but simple. A ₹1,00,000 deposit at 8% compounded annually becomes ₹2,16,000 in 10 years without you adding a single rupee. That’s ₹1,16,000 of pure interest on interest.

The formula

A = P × (1 + r/n)^(n × t)

Where:

• A = Final amount (maturity)
• P = Principal (initial deposit)
• r = Annual interest rate (decimal)
• n = Compounding frequency per year
• t = Time in years

How compounding frequency matters

The same 8% rate produces different results depending on how often interest is compounded:

Frequency	n	₹1L after 10 years
Yearly	1	₹2,15,892
Quarterly	4	₹2,20,804
Monthly	12	₹2,21,964
Daily	365	₹2,22,535

The difference between yearly and daily compounding on ₹1L over 10 years is about ₹6,600. Not dramatic — but on larger amounts and longer horizons, it compounds (pun intended).

The Rule of 72

Want to know how long it takes to double your money? Divide 72 by the interest rate:

Doubling time = 72 / interest rate
At 8%: 72/8 = 9 years to double
At 12%: 72/12 = 6 years to double

Why starting early beats investing more later

Scenario A: Start at 25, invest ₹5,000/month for 10 years, then stop (total invested: ₹6L)
Scenario B: Start at 35, invest ₹5,000/month for 25 years until 60 (total invested: ₹15L)

At 12% return:

• Scenario A at age 60: ~₹2.8 crore
• Scenario B at age 60: ~₹1.9 crore

Starting 10 years earlier — even with less total investment — wins by nearly a crore. That’s the power of compound interest over time.

Where compound interest applies

• Fixed deposits (banks compound quarterly)
• Mutual funds and SIPs (compounding on returns)
• PPF (compounded annually)
• Savings accounts (daily/quarterly)
• Loans (working against you!)

Calculate your own scenarios with the OurDailyCalc compound interest calculator.

TL;DR

• Compound interest = interest on interest, growing exponentially
• More frequent compounding produces slightly higher returns
• Rule of 72: divide 72 by rate to get doubling time
• Time in market beats timing the market — start early