Definition of Compounding
Compounding (often called the 'eighth wonder of the world', attributed to Einstein) is the process where your investment returns generate their own returns over time — creating exponential rather than linear growth. The longer the time period, the more dramatic the compounding effect.
Example: ₹1 lakh invested at 12% annual return grows to ₹3.1 lakh in 10 years, ₹9.6 lakh in 20 years, and ₹29.9 lakh in 30 years — nearly 30x in 30 years. The same ₹1 lakh in a savings account at 4% would only reach ₹3.24 lakh in 30 years.
The key to maximizing compounding: start early, stay invested, don't interrupt the process. Even a 3-year gap in investing significantly reduces the final corpus. The last 5–10 years of a long SIP contribute nearly half the total corpus due to compounding. This is why the most important financial decision you can make is to start investing today, even with a small amount.