Compound Interest — The Power of Exponential Growth
Albert Einstein reportedly called compound interest the "eighth wonder of the world." Unlike simple interest (calculated only on the principal), compound interest is calculated on both the principal and the accumulated interest — meaning your money earns returns on its own returns. This creates exponential rather than linear growth.
Compound Interest FormulaFuture Value = P × (1 + r/n)^(n×t)
P = Principal · r = Annual rate · n = Compounding frequency · t = Years
P = Principal · r = Annual rate · n = Compounding frequency · t = Years
Lump Sum vs SIP — Which Grows More?
| Strategy | Investment | Rate | 10 Years | 20 Years |
|---|---|---|---|---|
| Lump Sum | ₹1,00,000 | 12% | ₹3,10,585 | ₹9,64,629 |
| SIP ₹5,000/mo | ₹6,00,000 total | 12% | ₹11,61,695 | ₹49,95,740 |
| Both combined | ₹7,00,000 total | 12% | ₹14,72,280 | ₹59,60,369 |
💡 SIP Advantage: Regular monthly investments (SIP) average out market volatility through rupee cost averaging and benefit from the compounding of smaller, frequent amounts.
The Rule of 72
The Rule of 72 is a quick mental math shortcut: divide 72 by the annual interest rate to find approximately how many years it takes to double your money.
- At 6% → doubles in 72÷6 = 12 years
- At 9% → doubles in 72÷9 = 8 years
- At 12% → doubles in 72÷12 = 6 years
- At 18% → doubles in 72÷18 = 4 years
Key Investment Concepts
- CAGR (Compound Annual Growth Rate): The annualised return rate of an investment over a period, accounting for compounding.
- XIRR: Extended IRR — used for irregular cash flows like SIPs. More accurate than CAGR for SIP returns.
- Inflation-adjusted return: Real return = Nominal return − Inflation rate. A 12% return with 6% inflation gives only a 6% real return.
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