Compounding, properly understood
Compounding is growth on growth. It starts slowly, then does almost all of the work, which is why time matters more than timing.
How compounding works
Invest ₹1 lakh at 12%. After one year you have ₹1.12 lakh. In year two, the 12% applies to ₹1.12 lakh, not ₹1 lakh, so you earn ₹13,440. Each year's return earns its own return.
After 10 years you have about ₹3.1 lakh. After 20, about ₹9.6 lakh. After 30, about ₹30 lakh. The last ten years added more than the first twenty combined.
₹1 lakh at 12% for 20 years: ₹9.65 lakh compounded, against ₹3.4 lakh with simple interest.
The three dials
Compounding depends on how much you invest, the rate you earn and how long you stay. Of the three, time is the only one you can't buy back. Starting at 25 instead of 35 can matter more than doubling your SIP later.
What interrupts it
Compounding hates interruptions: stopping SIPs in a downturn, withdrawing early, switching funds frequently and paying tax and exit loads each time, or high costs that shave 1 to 2% off every year.
The single best thing you can do for your compounding is usually nothing: keep investing, keep costs low, and stay put.
Key takeaways
- 1Returns earn returns; growth accelerates with time.
- 2Starting early beats investing more later.
- 3Protect compounding from interruptions and high costs.
Try it with your own numbers
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Educational content, not investment advice. Figures are illustrative.