What Is Compounding?

Compounding is growth on growth—your returns start earning returns. Over long periods, this creates exponential growth.

The Math in One Line

Future Value = Present Value × (1 + r)^n

• r: expected return rate per period
• n: number of periods

Small differences in r or n can lead to very different outcomes.

Time Is the Biggest Lever

Starting earlier adds more compounding periods. The first few years feel slow, then the curve steepens.

SIP vs Lumpsum for Compounding

• Lumpsum compounds the entire corpus from day one—great if you already have a corpus and a long horizon.
• SIP compounds each installment from its start date—great for building wealth steadily from income.

Model both using:

• SIP Calculator
• Lumpsum Calculator

Rule of 72 (Quick Doubling Estimate)

• Time to double ≈ 72 ÷ annual return (%)
• Example: At 12% returns, money doubles roughly every 6 years.

Does Frequency Matter?

• More frequent compounding (monthly vs annually) helps, but the effect is smaller than increasing time or return.
• Focus first on time in market and steady contributions.

Practical Ways to Boost Compounding

• Start today; even small amounts matter.
• Reinvest gains; avoid interrupting compounding.
• Increase contributions annually (step-up).
• Keep costs low and stay diversified.

Think in Real (After-Inflation) Terms

• If inflation is 6% and your portfolio returns 12%, your real growth is ≈ 6%.
• Plan goals in today’s rupees; escalate target amounts for inflation.

Common Pitfalls

• Interrupting compounding by frequent withdrawals.
• Chasing hot performers and switching often.
• Holding idle cash for long periods waiting for the “perfect” time.

Quick FAQ

• What return should I assume? Use conservative assumptions (e.g., 10–12% for diversified equity over long horizons).
• SIP or lumpsum for compounding? Use both where appropriate—SIP for income flows, lumpsum for surplus capital.
• When to review? Annually; rebalance if allocation drifts from target.

The Discipline Dividend

Compounding works only if you stay invested through cycles. Volatility is the price of admission for long-term growth.

Bottom Line

Compounding favors the patient. Give it time, keep adding, and let the math work in your favor.