Compounding
Earning returns on your returns.
What does it mean? (Simple)
Compounding is when you earn interest not just on your original investment, but also on the interest you've already earned. It's like a snowball effect.
The longer you stay invested, the more powerful compounding becomes. This is why starting early matters so much in investing.
Albert Einstein reportedly called compounding "the eighth wonder of the world."
Example with ₹ numbers
You invest ₹1,00,000 at 10% annual return. Year 1: ₹1,10,000. Year 2: ₹1,21,000 (10% on ₹1.1L, not ₹1L). Year 10: ₹2,59,000. Year 20: ₹6,72,000!
Common mistakes to avoid
- ⚠️Not starting early enough
- ⚠️Withdrawing returns instead of reinvesting
- ⚠️Underestimating how time affects growth
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⚠️ Educational only: This explanation is for learning purposes. Please consult a financial advisor for personalized advice.