Compound interest is the reason a रू 1,00,000 FD becomes more than रू 1,09,000 after one year — not exactly रू 1,09,000 as simple interest would suggest. This guide explains the difference clearly, with Nepal bank examples.
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Compound interest means you earn interest on your interest — not just on your original amount.
Simple interest: You earn the same amount every period. Compound interest: Each period you earn interest on a larger amount (original + accumulated interest).
The difference seems small over one year but becomes dramatic over 5–20 years.
Simple interest vs compound interest — side by side
Starting amount: रू 1,00,000 at 9% annual interest
| Year | Simple interest balance | Compound interest balance (quarterly) |
|---|---|---|
| 1 | रू 1,09,000 | रू 1,09,308 |
| 3 | रू 1,27,000 | रू 1,30,861 |
| 5 | रू 1,45,000 | रू 1,56,047 |
| 10 | रू 1,90,000 | रू 2,43,507 |
| 20 | रू 2,80,000 | रू 5,93,158 |
After 20 years, compound interest generates रू 3,13,158 more than simple interest on the same principal. This is not magic — it is mathematics working in your favor.
The compound interest formula
A = P × (1 + r/n)^(n×t)
Where:
- A = Final amount
- P = Principal (your initial deposit)
- r = Annual interest rate (as decimal: 9% = 0.09)
- n = Times interest is compounded per year (quarterly = 4)
- t = Time in years
Example: रू 1,00,000 at 9% for 1 year, compounded quarterly:
- A = 1,00,000 × (1 + 0.09/4)^(4×1)
- A = 1,00,000 × (1.0225)^4
- A = 1,00,000 × 1.09308
- A = रू 1,09,308
How Nepal banks compound interest
Most Nepal commercial banks compound quarterly (4 times per year) for fixed deposits. This means:
- Every 3 months, your earned interest is added to your principal
- The next quarter's interest is calculated on the larger amount
For savings accounts, most Nepal banks calculate interest daily but credit it monthly or quarterly. This daily calculation gives slightly better returns than monthly compounding.
Why quarterly compounding matters for FD
If two banks both offer 9% annual rate but one compounds monthly and one quarterly, the monthly compounding bank pays slightly more:
| Compounding frequency | Effective annual yield on 9% |
|---|---|
| Annually | 9.00% |
| Quarterly (Nepal standard) | 9.308% |
| Monthly | 9.381% |
| Daily | 9.416% |
The difference between quarterly and daily compounding is small (0.1%). The stated annual rate matters far more than the compounding frequency when choosing a bank.
Compound interest in SIP investments
SIP mutual funds do not use a fixed compounding schedule like FD. Instead, your units grow with market returns, which create a compounding effect over time:
- Month 1: You invest रू 5,000, buy 100 units at NAV रू 50
- Month 12: NAV has grown to रू 55. Your 100 units are now worth रू 5,500
- Month 13: Your new रू 5,000 investment buys units at the higher NAV — but the original units are already compounding
Over 15 years, this effect becomes so powerful that the last 5 years of a 15-year SIP often generate more wealth than the first 10 years combined.
Use the SIP Calculator to visualize this compounding curve.
The Rule of 72 — how long to double your money
A quick mental shortcut: divide 72 by the interest rate to get the number of years to double your money.
| Interest rate | Years to double |
|---|---|
| 7% (FD lower end) | 72 ÷ 7 = 10.3 years |
| 9% (FD competitive) | 72 ÷ 9 = 8 years |
| 12% (SIP assumed) | 72 ÷ 12 = 6 years |
| 15% (equity bull market) | 72 ÷ 15 = 4.8 years |
At 9% FD compounded quarterly, रू 1,00,000 doubles to approximately रू 2,00,000 in about 8 years.