One of the best ways to ensure that you create wealth over the long term is by making use of compound interest. Compound interest is the process where the interest that you generate from an investment is reinvested to earn more interest. To put it simply, compound interest is basically just interest on interest. Thanks to compounding, the interest that you get to earn on your investment increases with every year due to it being reinvested. 

Okay so, now that we’ve gotten the concept of compound interest out of the way, let’s take a look at how it can effectively double the value of your assets. Yes, you read that right. When given enough time, compound interest can give you 100% return. In this article, we’re going to be taking a look at just that and how a compound interest calculator can help you realize the potential of this unique concept. 

What is a compound interest calculator?

Firstly, let’s get this out of the way. A compound interest calculator is a nifty online calculator that can help you instantly determine the maturity amount and the amount of compound interest that you get to earn from an investment. 

All that you need to do is enter a few values pertaining to your investment such as the amount of investment, tenure of investment, rate of interest, and the frequency of compounding. The calculator will quickly run these values through a formula and give you the results immediately.  

How can a compound interest calculator help you understand how to double the value of your assets? 

Now that you’re aware of what a compound interest calculator is and how to use one, let’s get to the main part of the article. 

Let’s say that you wish to double your investment amount of Rs. 10 lakh to Rs. 20 lakhs. And that you’re planning on investing in a fixed deposit scheme that gives you an interest of 7% per annum. Since you wish to use the power of compound interest, you choose to open a cumulative FD, where the interest that you gain is reinvested back into the FD till the end of the selected tenure. Most bank FDs have a compounding frequency of quarterly, which means that the interest you earn is compounded 4 times in a year.  Based on the principal amount, interest rate, and frequency of compounding, an FD calculator will help you determine how much interest you will receive on your FD.

Now, you have all the data that you need to use a compound interest calculator, except for the most important one - the tenure. You’re not aware of how long you would need to stay invested in the FD other than the fact that you would need to double your investment from Rs. 10 lakh to Rs. 20 lakhs. In this case, how would you find out the tenure of the investment? 

Simple, by a bit of trial and error. Enter all the above data in an online calculator except the tenure. Start by specifying the tenure as 5 years to see how much you end up with on maturity and work your way up from there. Soon enough, you will land on the tenure that you need to invest the FD for to double your investment.

In this example, you would have to stay invested for a period of 10 years to convert Rs. 10 lakh into Rs. 20 lakhs. 

Conclusion

The compound interest calculator is a very useful tool that can help you plan your investments in a much better manner. However, if you’re interested in generating higher returns than what compounding can offer in exchange for a little bit of risk, you could try investing in the stock market. If you're considering investing in the stock market, you can use a mutual fund calculator to help you determine how much you can afford to invest, and to compare the risk and return profiles of different funds. You may also use a PPF calculator to determine the growth rate of your PPF investment over time given a particular rate of interest and initial investment. This might assist you in deciding whether PPF is a wise investment for you and how much you should invest in PPF in order to achieve your financial objectives. For instance, you could invest in upcoming IPOs, start a mutual fund SIP, or trade in derivatives. 

That said, if you wish to participate in the stock market, you would first need to have a demat account in your name. Visit Motilal Oswal today to open a demat account and a trading account through a paperless process. 

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