Frequently Asked Questions
1. Which Investments Should I Make to Get the Benefits of Compounding?
Compound interest is available on a variety of investments in India. You can use the power of compounding calculator to assess the benefits of many of these investments if you stay involved for the long term. ULIP plans, Public Provident Fund (PPF), mutual funds, a fixed deposit with reinvestment, and the National Pension Scheme (NPS) are just a few examples.
2. Should I go for Daily Compounding or Monthly Compounding?
The concept is that the shorter the compounding period, the larger the interest rate. Although the difference may not be significant, daily compounding is preferable to most investors. Daily compounding will result in a slightly greater interest rate than the other options.
3. How Is Compound Interest Different from Simple Interest?
Simple interest is interest calculated just on the principal amount. Whereas compound interest is computed on both the principal and the interest component of a loan. In simple words, compound interest is interest on interest.
For example, if the principal is Rs. 20,000 and the cumulative interest is Rs. 4,000, interest is only computed on Rs. 20,000 under a simple interest scheme with a 10% interest rate. However, interest is calculated on Rs. 24,000, i.e., principal + interest in a compound interest investment. You can use a compound interest calculator online to quickly determine the maturity value of an investment.
4. How Often Is Interest Compounded?
It’s also vital to understand the frequency at which interest is compounded to better understand the power of compounding. Depending on the investment or scheme, compound interest can be calculated daily, monthly, quarterly, semi-annually, or annually.
5. How To Calculate Compound Interest?
It can be calculated using the compound interest formula calculator, which is readily available online. Once you put in the necessary details such as investment amount, period, and the expected annual rate of return, the calculator will display the corresponding results.
6. What is the formula for calculating compound interest?
Here is the formula for calculating compound interest: A = P (1 + r/n)^n*t
P – Principal amount
A – Compound Interest
R – Rate of interest
N – Frequency of compounding
t – Number of years
7. What is the effective interest rate annually?
An effective interest rate refers to the real return on any type of interest-paying investment after the effects of compounding over time are considered.
8. Is it possible to compute my returns on my National Savings Certificate?
People who invest in National Savings Certificate (NSC) can easily compute the amount they will receive at maturity. By entering the basic details on an online compound interest calculator, individuals can find out the returns on NSC.
9. Do I need to pay a fee to use an online compound interest calculator?
No, most compound interest calculators available online are free to use.
10. Is an online compound interest calculator dynamic enough to handle the fluctuating rate of interest?
Yes. Online compound interest calculators usually ask you to enter the investment amount, interest rate, time period, etc., manually so they can deliver dynamic results as per your requirements.
11. What are compound interest investments?
Compound interest investments are the investments that earn interest on interest. It allows interest earned to earn interest, which leads to growth in the value of the returns.
Some of the compound interest investments include: -
- Fixed Deposits
- Recurring Deposits
- National Savings Certificate (NSC)
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)