Also known as: compounding, compound growth
Compounding is the mathematical reason small, consistent investments turn into large sums over long horizons. Each year, you earn interest on a slightly larger base than the year before — so the absolute amount of interest grows even when the percentage stays the same.
A concrete example: ₹1 lakh invested at 12% compounded annually becomes ₹3.11 lakh in 10 years, ₹9.65 lakh in 20 years, and ₹29.96 lakh in 30 years. The first decade tripled your money. The third decade alone added more than three times what the first decade did. This non-linear growth is why time horizon dominates investment outcomes.
The compounding frequency matters too. Monthly compounding produces a slightly higher effective return than annual compounding at the same nominal rate. Most mutual funds compound continuously; most bank deposits compound quarterly.
The famous rule of 72 is a quick shortcut: divide 72 by the annual rate to estimate how many years it takes to double your money. At 12%, money doubles in roughly 6 years. At 6%, it takes 12. The arithmetic explains why even small rate differences matter enormously over decades.