The Power of Compounding: Why Starting Early Wins
Compounding means earning returns not just on your principal but also on all the returns accumulated so far — Einstein reportedly called it the eighth wonder of the world. A 25-year-old investing ₹5,000/month at 12% CAGR until age 60 accumulates approximately ₹3.2 crore; a 35-year-old doing the same reaches only ₹90 lakh — less than a third, despite contributing for just 10 fewer years. This gap is entirely due to compounding, and it is why every year you delay has a disproportionate cost.
Frequently asked questions
Quick answer
What is the Rule of 72 in investing?
The Rule of 72 is a shortcut to estimate how long it takes an investment to double: divide 72 by the annual return rate. At 12% returns, your money doubles every 6 years; at 7.1% (PPF rate), it doubles every ~10 years. It works for any compounding rate and is accurate enough for practical planning.
What is the Rule of 72 in investing?
The Rule of 72 is a shortcut to estimate how long it takes an investment to double: divide 72 by the annual return rate. At 12% returns, your money doubles every 6 years; at 7.1% (PPF rate), it doubles every ~10 years. It works for any compounding rate and is accurate enough for practical planning.
How does compounding work in a mutual fund SIP?
With SIP, each monthly instalment buys units that then generate returns, and those returns generate further returns in subsequent years. The longer the investment stays untouched, the more aggressively the exponential curve bends upward — the majority of a 20-year SIP corpus is typically generated in the final 5 years of the investment period.
Is compound interest available on FDs in India?
Yes — most Indian bank FDs compound interest quarterly, meaning interest earned each quarter is added to the principal and earns interest in the next quarter. For a 3-year FD at 7.5% compounded quarterly, the effective annual yield (EAY) is approximately 7.71%, slightly higher than the stated rate.
What is the best investment for compounding in India?
Equity mutual funds (via SIP) offer the highest long-run compounding rate historically (~12–14% CAGR) among mainstream Indian investment products, though they carry market risk. For risk-free compounding, PPF (7.1%, tax-free) and Sukanya Samriddhi Yojana (8.2%) are strong choices because returns are tax-exempt, boosting the effective compounding rate.