Compounding

How it works

Compounding is the engine of long-term wealth: your gains get reinvested and then generate gains of their own, creating a snowball effect. In year one you earn a return on your principal. In year two you earn a return on the principal *plus* last year's gain — and so on. The growth curve starts slow and flat, then bends sharply upward in later years. Albert Einstein reputedly called it the eighth wonder of the world.

The math intuition

A handy shortcut is the Rule of 72: divide 72 by the annual return to estimate years to double your money. At 12% a year, money roughly doubles every six years. So ₹1 lakh becomes ₹2 lakh in 6 years, ₹4 lakh in 12, ₹8 lakh in 18 — most of the magic happens in the *final* stretch, which is why time is the most important ingredient.

In India

Compounding is exactly why SIPs in equity mutual funds, PPF, and EPF build large corpuses over decades. A modest monthly SIP started in your twenties can dwarf a much larger one started in your forties, simply because of the extra years of compounding. Reinvesting dividends and choosing growth-option funds (which auto-reinvest) maximises the effect.

Common mistakes

Compounding rewards patience over cleverness — staying invested through ups and downs, and starting early, beats trying to time the market for most people. The great enemy of compounding is interruption — withdrawing early, stopping SIPs in a downturn, or frequently switching investments resets the snowball. High costs and taxes also quietly erode it. People underestimate how much later years contribute, so they start late or pull out too soon. To harness compounding: start early, stay invested, keep costs low, and resist the urge to tinker — consistency over decades, not cleverness in any single year, is what turns modest savings into life-changing wealth.