Compounding — Mutual Fund Term Explained

Earning returns on your returns. Over long periods, compounding transforms modest annual returns into exponential wealth growth.

Compounding is the process where returns earned on an investment are reinvested to earn additional returns. The longer you stay invested, the more powerful compounding becomes.

₹1 lakh growing at 12% for 30 years becomes ₹29.96 lakh — 30x the original investment.

Formula

Future Value = Principal × (1 + Rate)^Years

Example

₹10,000/month SIP at 12% for 30 years → corpus of approximately ₹3.5 crore vs total investment of ₹36 lakh.

Related terms

• CAGR — Compound Annual Growth Rate. Measures how much a lump sum investment grew per year on average. Not ideal for SIP returns — use XIRR instead.
• XIRR — Extended Internal Rate of Return. The most accurate way to calculate SIP returns — accounts for the exact timing and amount of each cash flow.
• SIP (Systematic Investment Plan) — Investing a fixed amount in a mutual fund at regular intervals — typically monthly. Builds discipline and uses rupee cost averaging to reduce timing risk.
• Growth Option — The default option where all returns are reinvested — no payouts. NAV compounds over time. Tax-efficient for long-term investors.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.