What Is Compound Interest?
A clear explanation of compound interest, how it differs from simple interest, and why time matters in financial planning.
Compound interest basics
Compound interest is interest calculated on the original amount and on interest previously added to it. Over time, this can make the balance grow faster than simple interest, assuming the rate and contributions remain unchanged.
It is a mathematical concept, not a promise of investment performance. In a market-linked investment, the return is not fixed.
Simple interest versus compound interest
| Method | Interest is calculated on | Why time matters |
|---|---|---|
| Simple interest | Original principal | Growth is linear when the rate stays constant. |
| Compound interest | Principal plus accumulated interest | Growth can accelerate as interest is added to the base. |
Why time matters
Compounding has more opportunity to work over longer periods. Regular contributions can also add to the balance that may earn future returns.
That does not mean every long-term investment will deliver the same outcome. Rate assumptions, fees, taxes, withdrawals, and market performance can all affect results.
Using calculators responsibly
Use a calculator to explore what different assumptions would mean, then consider the limits of those assumptions. For an FD, use the rate and terms supplied by the bank. For a SIP, treat expected returns as illustrative only.