Albert Einstein famously called compound interest the "eighth wonder of the world." In the world of investing, compounding is the magic that turns small, consistent savings into a fortune over time.
What is Compounding?
Compounding is simply "interest on interest." When you invest in mutual funds, your returns are reinvested to generate their own returns. Over a long period, this snowball effect can lead to exponential growth.
Total Invested: ₹24 Lakhs
Total Value: ₹99.9 Lakhs
Gain: ₹75.9 Lakhs!
The Three Rules of Compounding
- Start Early: Time is the most critical factor. A 25-year-old starting with ₹5,000/month will accumulate significantly more than a 35-year-old starting with ₹10,000/month by the time they are 60.
- Be Consistent: Regular investing (like SIPs) ensures you keep adding to your principal, fueling the compounding engine.
- Be Patient: Compounding works best in the later years. The graph is exponential—it looks flat at first but shoots up vertically after 10-15 years.
Compounding in Mutual Funds
Mutual funds are efficient compounding machines because they allow for automatic reinvestment of dividends and capital gains. By choosing the "Growth" option in mutual funds, you ensure that every rupee earned is put back to work.
Don't Interrupt the Process
The biggest mistake investors make is withdrawing money too early. Just like pulling a sapling out of the ground to check its roots, withdrawing funds prematurely kills the compounding momentum. Stay invested for the long haul to see the true magic.