Compounding: growth on growth
Compounding is earning returns on past returns — an effect whose power comes from time, and which works on costs too.
General investing education — not investment advice. These explainers describe concepts in plain language; they do not assess any fund, security, or person's situation. Investing involves risk, including possible loss of principal. For guidance on personal decisions, consult a SEBI-registered investment adviser.
Not investment advice.
The idea
Compounding is what happens when returns themselves start earning returns. In year one, growth applies to the original amount; in year two, to the original amount plus year one's growth; and so on. The result is a snowball: growth that accelerates with time rather than accumulating in a straight line.
An illustration
At an assumed constant 8% a year, ₹1,00,000 grows to about ₹2.16 lakh in 10 years. Without compounding — if each year's 8% were earned only on the original amount — the total would be ₹1.80 lakh. The extra ≈₹36,000 is growth earned on growth. Real investments do not grow at a constant rate; values fluctuate and can fall. This is a hypothetical illustration with assumed figures (authored June 2026), not a projection of any actual investment. Real returns vary and may be negative.
Time is the active ingredient
The compounding curve is gentle early and steep late: in the illustration above, more growth arrives in the final three years than in the first five. This is why the length of time invested has such weight in long-run outcomes — an effect that exists in the arithmetic itself, independent of any particular investment.
It works on costs too
Compounding is indifferent to direction: annual costs and inflation compound exactly the way returns do, quietly scaling with the balance every year. The expense ratio explainer shows the same arithmetic applied to fees.
Related concepts: SIP & rupee-cost averaging, expense ratio (TER).