What is Compounding in investment?

Compounding is the process where your investment earnings start earning their own earnings. In simple words, you earn returns not only on your original investment but also on the returns already generated. This is why compounding is often called the “snowball effect” in investing.


How compounding works?

• You invest some money (principal).
• That money earns returns (interest/profit).
• Those returns are reinvested, not withdrawn.
• In the next period, you earn returns on:

• original money +
• previous returns.
• Over time, the growth accelerates.

Simple example
You invest ₹10,000 at 10% annual return.
Year 1: ₹11,000
Year 2: ₹12,100
Year 3: ₹13,310
Here, returns are earned on ₹10,000 + earlier profits, not just on ₹10,000.