“ Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. ”

- Benjamin Franklin



Let’s take an example -

Suppose you invest INR 10,000 into a company. The first year, the shares rise 20%. Your investment is now worth INR 12,000. Based on good performance, you hold the stock. In Year 2, the shares appreciate another 20%. Therefore, your INR 12,000 grows to INR 14,400. Rather than your shares appreciating an additional INR 2,000 (20%) like they did in the first year, they appreciate an additional INR 2,400, because INR 2,000 you gained in the first year grew by 20% too.

If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, INR 10,000 invested at 20% annually for 25 years would grow to nearly INR 14,00,000 - and that's without adding any money to the investment!

If you add money regularly to such an investment, then the results will be mind blowing Have a look at power of compounding.


Initial Investment - INR 10000
Time (Years) 5% 10% 15% 20%
5 ₹ 12,834  ₹ 16,453  ₹ 21,072  ₹ 26,960 
10 ₹ 16,470  ₹ 27,070  ₹ 44,402  ₹ 72,683 
15 ₹21,137  ₹44,539  ₹93,563  ₹1,95,950 
25 ₹ 34,813  ₹ 1,20,569  ₹ 4,15,441  ₹ 14,24,214 
30 ₹ 44,677  ₹ 1,98,374  ₹ 8,75,410  ₹ 38,39,640 
35 ₹ 57,337  ₹ 3,26,387  ₹ 18,44,648  ₹ 1,03,51,554 
40 ₹ 73,584  ₹ 5,37,007  ₹ 38,87,007  ₹ 2,79,07,480 

Few interesting facts:

1.Manhattan Island was sold to Peter Minuit for ~ $24 during 1626. Currently it is said that the worth of whole of the Island is around $ 1.4 trillion. But, if we calculate worth of those $24 with a rate of 8% p.a, then Manhattan Indians would have earned more than $ 9 trillion !

2.It is said that Columbus who discovered America in 1492, was given $30,000 to start the expedition. Warrant Buffett wrote in his 1962 letter to shareholders “Figured very roughly, the $ 30,000 invested at 4% compounded annually would have amounted to something like $ 3 trillion by 1962”