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Compound interest is the interest you earn on both your original investment and the interest that you keeping earning. This allows your savings to increase more quickly over time.
Let's understand it with the help of an example. If you invest ₹40,000 with an annual interest rate of 10% for 5 years, the returns
For 1st year: ₹40,000 x 10% = ₹4,000.
For 2nd year: the interest will be calculated on ₹44,000 ( ₹40,000 + ₹4,000 {first year interest}). So, 10% of ₹44,000, which is ₹4,400.
For 3rd year: ₹48,400 x 10% = ₹4,840,
and so on.
It’s difficult to calculate the amounts manually over a long period of time. That is why you need a compound annual growth rate calculator to make the task easier.
Think of a CAGR calculator as a time machine for your money. This tool maps out how your money grows over time when interest or returns are compounded. Instead of adding interest to the initial amount, it reinvests the earnings, making your money grow faster. Whether investing in stocks, mutual funds, commodities or fixed deposits, this calculator provides a plan for the future by showing how small investments can turn into big gains over time.
Both the CAGR calculator and an annualised return calculator help investor calculate the returns on their investments but use different methodologies. CAGR measures the smoothed annual growth rate of an investment over a specific time, assuming profits are reinvested annually. It’s ideal for long-term investments. In contrast, an annualised return calculates geometric average amount of money earned by an investment each year over a given time period.
A CAGR is typically used to describe the growth rate over a period, whereas annualized return is used to express the average yearly return over that period.
A=P(1+r/n)nt
where,
A = Compound Interest
P = Principal Amount
r = Rate of Interest
n = number of times interest compound in a year
t = Number of years
Having a plan in place is the best way to attain financial independence and a CAGR calculator can help you in your journey. Here’s how it helps:
- Wealth projection: Estimate how your investment amount grows over time with compounding making financial planning easier.
- Better investment decision: Allows comparison of different investment options based on growth potentials.
- Saves time: Quickly calculates without complex manual calculations making corpus forecasting simple and efficient.
Arihant’s compound annual growth rate calculator is super easy to use for any beginner. You just have to input the compounding period, investment amount and expected rate of return to get the roadmap for your first crore. The best part is that you can increase the holding period for a few years and see how compounding does miracles to your investment corpus.
To take advantage of compound interest over time, start a SIP investment today. Open an account with Arihant and you can start your SIP in a few clicks through the ArihantPlus app.