Glossary term

Compounding

Earning returns on previously earned returns. The exponential force behind every long-term wealth plan.

Compounding is the process by which the returns on an investment themselves earn returns. Over a single year it's barely noticeable; over 20+ years it does most of the heavy lifting in any wealth plan. A ₹10,000 monthly SIP for 15 years at 12% gives ₹50.45 lakh — ₹18 lakh contributed, ₹32.45 lakh from compounding.

The rule of 72 is a handy shortcut: divide 72 by the annual return rate to estimate doubling time. At 12%, money doubles every 6 years.