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Compound Interest Formula for Calculating Returns
July 03 , 2013

Formula of compound interest is a hugely useful tool for calculating return on investments. Basic compound interest formula from which other formulae can be derived is

A = P(1 + r%/n)^nt

here A - final amount

P - start amount (or installment)

r   - rate of interest

n  - number of times interest is compounded in a year

t   - number of years

You can use this formula in excel to calculate return on many of your investments.

Where to use compound interest excel formula

Compound interest formula can be used in excel with slight variations to calculate returns of FD, RD and mutual fund investment.

Fixed deposit returns using compound interest

Usually banks compound interest on quarterly basis in fixed deposit. In a year there are 4 quarters so the formula for calculating fixed deposit maturity value after t years would be

A = P*(1 + r%/4)^4*t

For example if you have a 2 year Fixed Deposit of Rs 25,000 earning 9% interest then at maturity you get Rs 29,871. In this example P = 25,000, r = 9%, t = 2.

Mutual fund returns using compound interest

Though returns of mutual funds are market-linked and not announced in advance, you can estimate likely returns on your investment using compound interest formula. If you assume that returns are compounded once a year the formula for mutual return after t years would be

A = P*(1 + r%)^t

Suppose you invest Rs 25,000 in a mutual fund that has given 12% annual returns then after 5 years the value of your investment would be Rs 44,059.

Recurring deposit returns using compound interest

In a typical RD you deposit a fixed amount every month which is compounded quarterly by banks. The formula for compound interest of recurring deposit is slightly complicated and is as follows

A = P*((1+r%/4)^(4*t)-1)/(1-(1+r%/4)^(-1/3))

Take a 2 year monthly recurring deposit with 9% interest of installment Rs 1,000. At the end of 2 years the maturity amount of the RD would be Rs 26,366.

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