How Compound Interest Works

Compound interest means earning interest not only on your original investment but also on the interest that was added earlier.

In simple words, your money earns money… and that money also earns money.

Simple Interest vs Compound Interest

• Simple Interest: Interest is calculated only on the original amount.
• Compound Interest: Interest is calculated on original amount + accumulated interest.

Example of Compound Interest

Let’s say you invest ₹10,000 at 10% annual return.

Year 1:
Interest = ₹1,000
Total = ₹11,000

Year 2:
Interest = 10% of ₹11,000 = ₹1,100
Total = ₹12,100

Now you are earning interest on ₹12,100, not ₹10,000.

This cycle continues every year.

Why Compounding is Powerful

• Works best over long time periods
• Grows slowly at first, then faster
• Rewards patience and discipline
• Essential for long-term investing

Compounding in SIP

When you invest through a Systematic Investment Plan (SIP), your returns are automatically reinvested.

This creates a compounding effect that can significantly increase wealth over 10–20 years.

The earlier you start SIP, the stronger compounding works for you.

The Golden Rule of Compounding

Start Early.

Time is the biggest power in wealth building.

Final Thoughts

Compound interest is not magic. It is mathematics plus time.

Invest consistently. Stay patient. Let compounding work for you.

Learn What is SIP →

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