{"id":21249,"date":"2023-02-06T18:01:55","date_gmt":"2023-02-06T12:31:55","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=21249"},"modified":"2023-02-06T18:01:55","modified_gmt":"2023-02-06T12:31:55","slug":"understanding-the-power-of-compounding","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/","title":{"rendered":"Understanding the power of compounding"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_40 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" area-label=\"ez-toc-toggle-icon-1\"><label for=\"item-69e74810d290c\" aria-label=\"Table of Content\"><span style=\"display: flex;align-items: center;width: 35px;height: 30px;justify-content: center;direction:ltr;\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/label><input  type=\"checkbox\" id=\"item-69e74810d290c\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#What_is_Compounding\" title=\"What\u00a0is Compounding?\">What\u00a0is Compounding?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#Compounding_in_Mutual_Funds\" title=\"Compounding in Mutual Funds\">Compounding in Mutual Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#In_a_Nutshell\" title=\"In a Nutshell\">In a Nutshell<\/a><\/li><\/ul><\/nav><\/div>\n<p>&nbsp;<\/p>\n<div class=\"embed-container\">\n<div class=\"embed-container\">\n<div class=\"embed-container\">\n<div class=\"embed-container\">\n<div class=\"embed-container\"><iframe src=\"https:\/\/www.youtube.com\/embed\/9XzEAbshPJM\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"What_is_Compounding\"><\/span><strong>What\u00a0is Compounding?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>&nbsp;<\/p>\n<p>Compounding, in simple terms, means the interest levied on both principal and interest components. It contrasts with simple interest, where you earn interest only on the principal component. Suppose you have Rs. 1000 and you lend it to someone @ 12% per annum. Now, in the case of simple interest, you will earn Rs. 150 each year.<\/p>\n<p>&nbsp;<\/p>\n<p>However, in the case of compound interest, you will earn Rs. 150 in your first year. However, in the second year, you will earn Rs. 172.5 [(1000+150) * 15%]. In the third year, you will earn Rs. 198.38 [(1000+150+172.5) * 15%]. The interest amount will keep on increasing each year.<\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Compounding_in_Mutual_Funds\"><\/span><strong>Compounding in Mutual Funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>&nbsp;<\/p>\n<p>Mutual funds are some of the best compounding investments to compound your wealth. The longer you stay invested, the more your wealth compounds. However, while selecting the mutual funds, you shall compare and analyse the return and the expense ratio to select the best one. This is because even a 1% increase in the expense ratio can create a huge difference in the returns you receive. Let&#8217;s explain how compounding in mutual funds works.<\/p>\n<p>&nbsp;<\/p>\n<p>Suppose you start a SIP investment of Rs. 10,000 each month. You have two schemes to invest. Scheme A provides an annual return of 13% per annum, whereas Scheme B provides a return of 14% per annum. Let&#8217;s see how much wealth you will accumulate at each 10-year interval:<\/p>\n<p>Notice the difference? There are two important observations here concerning SIP compounding interest:<\/p>\n<p>&nbsp;<\/p>\n<p>The amount of wealth increased slowly in the initial years. However, after crossing 30 years, the wealth started multiplying magnificently. This is because compounding shows its magic at later stages after a certain amount of time has passed.<\/p>\n<p>&nbsp;<\/p>\n<p>A 1% return difference can create a difference of Rs. 31.4 crores (Rs. 91.23 crores \u2013 Rs. 59.83 crores) for the same amount invested over the same tenure. That&#8217;s a huge difference! This difference is also due to the compounding\u2014the 1% difference in returns compounded for 50 years to generate this difference.<\/p>\n<p>&nbsp;<\/p>\n<p>To further understand mutual fund compounding, you can use the MF compounding interest calculator to understand how much return you can earn in how many years and at what interest rate.<\/p>\n<p>&nbsp;<\/p>\n<p>Real-Life Example for Compounding &#8211; Warren Buffet<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/kuvera.in\/fixed-deposit\/all\"><img loading=\"lazy\" class=\"aligncenter wp-image-20958 size-full\" src=\"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/01\/FD-Banner-9.05-01-1.jpg\" alt=\"latest fixed deposits\" width=\"600\" height=\"150\" srcset=\"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/01\/FD-Banner-9.05-01-1.jpg 600w, https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/01\/FD-Banner-9.05-01-1-300x75.jpg 300w, https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/01\/FD-Banner-9.05-01-1-150x38.jpg 150w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p>While you understand how compounding works in SIP, let&#8217;s take a real-life example of how compounding can make you wealthy. Most people have heard of Warren Buffet. He is an idol for most investors, the reason being that he accumulated generational wealth through investing. In 2008, he became the wealthiest person in the world with a net worth of $ 62 Billion by overtaking Bill Gates, who was in first place on the Forbes list for 13 consecutive years.<\/p>\n<p>&nbsp;<\/p>\n<p>If you analyse Warren Buffet&#8217;s net worth in different timelines, you will notice that there has been a significant rise only in the later stages of his life. He became a millionaire at 30, crossing the $ 1 million mark. Then, it was only after crossing 56 years of age that he entered the billionaire elite club with his net worth crossing the $ 1 billion mark. And his net worth (as of March 2022) was $ 117 billion. To put it into perspective, he accumulated more than 99% of his wealth only after his 50th birthday.<\/p>\n<p>&nbsp;<\/p>\n<p>That&#8217;s the power of compounding. Warren Buffet is a real-life example to understand how compounding works in real life. And that&#8217;s true not only for investing but also for your daily habits. Good habits consistently performed will start providing compounding results after a particular stage. The same applies to bad habits.<\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"In_a_Nutshell\"><\/span><strong>In a Nutshell<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>&nbsp;<\/p>\n<p>Mutual funds and SIP are some of the best ways to reap compounding benefits. However, the profits must be reinvested into the scheme to reap compounding benefits. Therefore, you should understand the terms of the scheme before investing. If you select dividend-paying mutual funds, the compounding effect reduces as the profits are distributed instead of reinvested.<\/p>\n<p>&nbsp;<\/p>\n<p>If you want to multiply your wealth, it&#8217;s time you start investing and see the power of compounding mutual funds. The earlier you start, the more time your investments get to accumulate and compound.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><em>Interested in how we think about the markets?<\/em><\/p>\n<p><strong>Read more: <a href=\"https:\/\/kuvera.in\/blog\/category\/zen-and-the-art-of-investing\/\">Zen And The Art Of Investing<\/a><\/strong><\/p>\n<p>&nbsp;<\/p>\n<p><strong>Watch here:<\/strong> How to invest during a bear market?<\/p>\n<div class=\"embed-container\">\n<div class=\"embed-container\">\n<div class=\"embed-container\"><iframe src=\"https:\/\/www.youtube.com\/embed\/PTJ_lQXIAQ4\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><\/iframe><\/div>\n<\/div>\n<\/div>\n<div><\/div>\n<p>Start investing through a platform that brings goal planning and investing to your fingertips. Visit <a href=\"https:\/\/www.youtube.com\/watch?v=R7g03UwJAT8&amp;utm_source=Blog&amp;utm_medium=Weekly+wrap+22nd+July\" target=\"_blank\" rel=\"noopener\">kuvera.in<\/a> to discover Direct Plans and <a href=\"https:\/\/kuvera.in\/explore\/fixed-deposit\/c\/all\">Fixed Deposits<\/a> and start investing today. #MutualFundSahiHai #KuveraSabseSahiHai<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; &nbsp; What\u00a0is Compounding? &nbsp; Compounding, in simple terms, means the interest levied on both principal and interest components. It contrasts with simple interest, where you earn interest only on the principal component. Suppose you have Rs. 1000 and you lend it to someone @ 12% per annum. Now, in the case of simple interest, [&#8230;]<\/p>\n<p><a class=\"btn btn-secondary understrap-read-more-link\" href=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/\">Read More&#8230;<\/a><\/p>\n","protected":false},"author":11,"featured_media":21250,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false},"categories":[99],"tags":[2150,1837,23,1553,1551],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Understanding the power of compounding<\/title>\n<meta name=\"description\" content=\"Understand all about compounding in investment and how compounding affects your corpus in the long run.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Understanding the power of compounding\" \/>\n<meta property=\"og:description\" content=\"Understand all about compounding in investment and how compounding affects your corpus in the long run.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/\" \/>\n<meta property=\"og:site_name\" content=\"Kuvera\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/kuvera.in\" \/>\n<meta property=\"article:published_time\" content=\"2023-02-06T12:31:55+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/02\/Final-Wordpress-Cover-Image-Template_1200-\u00d7-900-px-1200-\u00d7-900-px-100.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Kuvera\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@Kuvera_In\" \/>\n<meta name=\"twitter:site\" content=\"@Kuvera_In\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kuvera\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Understanding the power of compounding","description":"Understand all about compounding in investment and how compounding affects your corpus in the long run.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/","og_locale":"en_US","og_type":"article","og_title":"Understanding the power of compounding","og_description":"Understand all about compounding in investment and how compounding affects your corpus in the long run.","og_url":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/","og_site_name":"Kuvera","article_publisher":"https:\/\/www.facebook.com\/kuvera.in","article_published_time":"2023-02-06T12:31:55+00:00","og_image":[{"width":1200,"height":900,"url":"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2023\/02\/Final-Wordpress-Cover-Image-Template_1200-\u00d7-900-px-1200-\u00d7-900-px-100.jpg","type":"image\/jpeg"}],"author":"Kuvera","twitter_card":"summary_large_image","twitter_creator":"@Kuvera_In","twitter_site":"@Kuvera_In","twitter_misc":{"Written by":"Kuvera","Est. reading time":"4 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#article","isPartOf":{"@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/"},"author":{"name":"Kuvera","@id":"https:\/\/kuvera.in\/blog\/#\/schema\/person\/6b774e7d3516942b9e0242c93d7cb307"},"headline":"Understanding the power of compounding","datePublished":"2023-02-06T12:31:55+00:00","dateModified":"2023-02-06T12:31:55+00:00","mainEntityOfPage":{"@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/"},"wordCount":741,"commentCount":0,"publisher":{"@id":"https:\/\/kuvera.in\/blog\/#organization"},"keywords":["benefit of compounding","benefit of debt fund","Compounding","compounding in investment","compounding in mutual funds"],"articleSection":["Investing 101"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#respond"]}]},{"@type":"WebPage","@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/","url":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/","name":"Understanding the power of compounding","isPartOf":{"@id":"https:\/\/kuvera.in\/blog\/#website"},"datePublished":"2023-02-06T12:31:55+00:00","dateModified":"2023-02-06T12:31:55+00:00","description":"Understand all about compounding in investment and how compounding affects your corpus in the long run.","breadcrumb":{"@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/kuvera.in\/blog\/understanding-the-power-of-compounding\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/kuvera.in\/blog\/"},{"@type":"ListItem","position":2,"name":"Understanding the power of compounding"}]},{"@type":"WebSite","@id":"https:\/\/kuvera.in\/blog\/#website","url":"https:\/\/kuvera.in\/blog\/","name":"Kuvera","description":"Wealth Management, Simplified","publisher":{"@id":"https:\/\/kuvera.in\/blog\/#organization"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/kuvera.in\/blog\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Organization","@id":"https:\/\/kuvera.in\/blog\/#organization","name":"Kuvera","url":"https:\/\/kuvera.in\/blog\/","logo":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/kuvera.in\/blog\/#\/schema\/logo\/image\/","url":"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/cropped-cropped-kuvera-logo-dark-3.png","contentUrl":"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/cropped-cropped-kuvera-logo-dark-3.png","width":83,"height":13,"caption":"Kuvera"},"image":{"@id":"https:\/\/kuvera.in\/blog\/#\/schema\/logo\/image\/"},"sameAs":["https:\/\/www.facebook.com\/kuvera.in","https:\/\/twitter.com\/Kuvera_In","https:\/\/www.instagram.com\/kuvera.in","https:\/\/www.linkedin.com\/company-beta\/10456535\/"]},{"@type":"Person","@id":"https:\/\/kuvera.in\/blog\/#\/schema\/person\/6b774e7d3516942b9e0242c93d7cb307","name":"Kuvera","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/kuvera.in\/blog\/#\/schema\/person\/image\/","url":"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2019\/07\/social-media-logo-02-alt-v3-150x150.jpg","contentUrl":"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2019\/07\/social-media-logo-02-alt-v3-150x150.jpg","caption":"Kuvera"},"description":"Kuvera is India's first free Direct Mutual Fund investing platform. We bring you goal-based investing and innovative features like Tax Harvesting, TradeSmart, Family Account and more!","sameAs":["http:\/\/kuvera.in"],"url":"https:\/\/kuvera.in\/blog\/author\/kuvera-research\/"}]}},"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/posts\/21249"}],"collection":[{"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/comments?post=21249"}],"version-history":[{"count":1,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/posts\/21249\/revisions"}],"predecessor-version":[{"id":21251,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/posts\/21249\/revisions\/21251"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/media\/21250"}],"wp:attachment":[{"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/media?parent=21249"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/categories?post=21249"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kuvera.in\/blog\/wp-json\/wp\/v2\/tags?post=21249"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}