The compound interest formula
A = P × (1 + r/k)^(k × t), where k is the number of compounding periods a year. ₹1 lakh at 10% for 5 years becomes ₹1.61 lakh with yearly compounding and ₹1.64 lakh with quarterly compounding. The more frequent the compounding, the higher the effective annual rate.
Why time matters more than rate
Compounding is slow at first and fast later. The same ₹1 lakh at 10% is ₹2.6 lakh after 10 years but ₹6.7 lakh after 20, which is why starting investments early beats finding a slightly higher return.
Frequently asked questions
What compounding do Indian banks use?
Quarterly for fixed deposits; savings accounts credit interest quarterly on daily balances.
What is effective annual rate?
The real yearly growth after compounding. 10% compounded quarterly is 10.38% effective.
Does this work for loans too?
Yes, for loans with no repayments during the period, such as education loans with a moratorium.