What It Is:
Compounding is the process where your money grows not just on the amount you invested, but also on the returns that money has already earned.
In Simple Words:
Your money earns money → That money also earns money → And the cycle continues → Leading to exponential growth over time.
Example:
If you invest ₹10,000 per month at a 12% annual return:
- In 10 years → approx. ₹23.2 lakh
- In 20 years → approx. ₹98.3 lakh
- In 30 years → approx. ₹3.5 crore
Most of this growth comes not from what you invested, but from compounding doing its magic over time.
Key Features:
Compounding rewards time in the market, not timing the market. Even small investments can grow significantly if started early and left untouched.
Benefits:
- Turns small, regular investments into large future wealth
- Reduces the pressure to invest big lumpsums
- Makes long-term goals (retirement, children’s education) more achievable
- Creates financial discipline through consistent investing
Limitations:
Compounding doesn’t work if you interrupt investments frequently or withdraw early. Lower returns or short horizons weaken the effect.
Best For:
Everyone. The best time to get the benefit of compounding was 20 years ago. The second best time is NOW.
Albert Einstein quote:
Albert Einstein supposedly called compounding the “8th wonder of the world”—”He who understands it, earns it; he who doesn’t, pays it.”
