Mutual Fund Calculator Compound Interest

Compound Interest Formula:

\[ FV = P \times (1 + \frac{r}{comp})^{(comp \times n)} \]

Principal Amount (P):

USD

Annual Interest Rate (r):

decimal

Compounding Frequency (comp):

times/year

Investment Period (n):

years

Future Value (FV):

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1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ FV = P \times (1 + \frac{r}{comp})^{(comp \times n)} \]

Where:

\( FV \) — Future value of the investment
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( comp \) — Number of compounding periods per year
\( n \) — Number of years the money is invested

Explanation: The formula accounts for the effect of compounding, where interest is earned on both the initial principal and the accumulated interest from previous periods.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return on investment. Common compounding frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).

4. Using the Calculator

Tips: Enter principal in USD, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding frequency (times per year), and investment period in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding leads to higher returns. For example, monthly compounding yields more than annual compounding at the same rate.

Q3: What is the Rule of 72?
A: It's a simple way to estimate how long an investment will take to double: 72 divided by the annual interest rate (as percentage) gives approximate years.

Q4: Are mutual fund returns guaranteed?
A: No, mutual funds are subject to market risks. This calculator assumes a fixed rate of return which may not reflect actual performance.

Q5: How does inflation affect these calculations?
A: This calculator shows nominal returns. For real returns (after inflation), subtract the inflation rate from the interest rate.