What is Compounding?

Compounding happens when your returns start earning returns. This is often called “interest on interest.”

• With simple interest, you only earn on the original amount you invested.

• With compound interest, you earn on both your original investment and the accumulated returns.

Over time, this small difference creates a massive gap in wealth.

The Power of Compounding Explained with ₹10,00,000 at 15%

To understand compounding, let’s take a simple example. Suppose you invest ₹10,00,000 at an annual return rate of 15%, and you keep reinvesting the returns every year.

• After 1 year, your money grows to ₹11,50,000.

• After 5 years, it becomes about ₹20,00,000—double your initial investment.

• By the 10th year, it grows to around ₹40,00,000, which is four times the original amount.

• At the end of 15 years, your ₹10,00,000 turns into more than ₹80,00,000.

• In 20 years, it crosses ₹1.6 crore.

• In 25 years, it grows further to about ₹3.3 crore.

• Finally, after 30 years, that same ₹10,00,000 investment becomes more than ₹6.6 crore.

This shows how compounding accelerates with time. Notice that in the first 10 years, your investment only grew from ₹10 lakh to ₹40 lakh. But in the last 10 years (from year 20 to year 30), it grew from ₹1.6 crore to ₹6.6 crore—an increase of ₹5 crore in just the final decade.

That’s the power of compounding: the longer you stay invested, the faster and larger your money grows.

Why Should You Care About Compounding?

• It shows why starting early is important. The earlier you begin investing, the more years you give your money to grow.

• It teaches patience. Wealth is not built overnight; compounding rewards those who stay invested.

• It highlights the danger of interrupting investments. Withdrawing early breaks the compounding cycle.

Educational Insight

If a student invests at age 25 and allows compounding to work for 30 years, they can turn lakhs into crores. But if the same investment starts at age 35, the outcome is much smaller, even if the amount invested is the same.

This is why compounding is called the foundation of financial planning.

Conclusion

Compounding is not magic; it’s simply the mathematics of time and reinvestment. But when you understand and apply it, the results feel magical.

₹10,00,000 at 15% becomes ₹6.6 crore in 30 years. That’s the power of staying invested.

So, the earlier you start and the longer you stay invested, the greater the benefits of compounding