Investments in the equity market work on the concept of compound interest. Compound interest is the addition of interest to the principal sum (your investment amount), or in other words, it is the interest on interest.

You benefit from the magic of compounding as your principal as well as your interest amount keeps getting reinvested in the market, so the interest earned in the next period is the interest earned on a larger pool of money, which is the principal sum plus previously accumulated interest.

This is why to calculate interest earned or returns earned, we use the formula of compound interest, which is A = P (1+r/n)^nt where,

- A is future value

- P is present value or principal amount

- r is the interest rate

- t is the number of years the money is deposited for

- n is the number of periods the interest is compounded each year.

Interest is compounded only once a year so you can ignore the second ‘n’ in the formula.

Using this formula one can calculate the amount he/she will get on maturity or redemption of the investment.

A = P (1+r/n)^ntwhere,Ais future valuePis present value or principal amountris the interest ratetis the number of years the money is deposited fornis the number of periods the interest is compounded each year.