Compound Interest
Also known as: compounding, compound growth
Compound interest is interest earned not just on your original investment, but also on the interest that has already been added to it.
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.