How does the frequency of compounding affect the total amount of interest earned?

The frequency of compounding can have a significant impact on the total amount of interest earned. In general, the more frequently the interest is compounded, the higher the total amount of interest earned over time.

When interest is compounded annually, it is calculated and added to the principal once a year. However, when interest is compounded more frequently, such as quarterly, monthly, or daily, the interest is calculated and added to the principal more often.

The more frequent compounding allows for the reinvestment of the earned interest, leading to a compounding effect on the overall investment or loan. This results in the growth of the principal amount at a faster rate, which, in turn, leads to higher interest earnings.

For example, let's consider a fixed deposit with an interest rate of 5% per annum. If the interest is compounded annually, the interest will be added once a year. However, if the interest is compounded quarterly, the interest will be added four times a year, resulting in more frequent compounding and higher total interest earned.

It's important to note that the frequency of compounding may vary depending on the financial institution and the specific investment or loan product. It's advisable to check with the respective institution or refer to the terms and conditions to understand the frequency of compounding used in India for different financial products.