Learn · SIPs and compounding
Compounding: why starting early matters
Growth on growth, and what 10 extra years can do.
3 min read
Growth on growth
When your investment grows, the growth itself starts growing too. In the early years it's slow. Later, most of the increase comes from past gains rather than new money.
₹2,000 a month at an assumed 12% a year
Value in ₹ lakh
You put in ₹2.4 lakh over 10 years and ₹7.2 lakh over 30. The difference is compounding.
Source: Illustration at an assumed 12% a year; real returns vary and can be negative.
Guess first
₹2,000 a month for 30 years, at an assumed 12% a year. Roughly what could it grow to?
See the answer
₹61 lakh. About ₹61.6 lakh. You'd have put in ₹7.2 lakh; everything else is growth on growth. Over 10 years the same SIP reaches only about ₹4.5 lakh: three times the time, almost 14 times the value.
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Time beats amount
₹2,000 a month until you turn 60. Pick when you start.
- At 22
- ₹1.56 crore You'd put in ₹9.1 lakh over 38 years.
- At 27
- ₹87.4 lakh You'd put in ₹7.9 lakh over 33 years.
- At 32
- ₹48.7 lakh You'd put in ₹6.7 lakh over 28 years. Ten years later, a third of the value.
Illustration at an assumed 12% a year; real returns vary and can be negative.
Myth
Compounding means my money grows every year.
Fact
Equity funds have bad years too. Compounding works over long periods, with falls along the way.
Inflation compounds too
Prices rise every year. At 6% inflation, what costs ₹1 lakh today costs about ₹1.8 lakh in 10 years. Money left idle loses value the same way.
Words from this lesson
- Compounding: Earning returns on past returns, not just on what you put in.
- Inflation: Prices rising over time, so the same money buys less.
Next in SIPs and compounding: When markets fall