The magic of compounding is the phenomenon in which the earnings or interest generated by an investment are reinvested back into the same investment, thus earning even more interest in subsequent periods. Over time, this compounding effect can result in significant growth in the value of the investment.
For example, let's say you invest Rs 10,000 in a mutual fund that has an average annual return of 12%. After the first year, your investment will have grown to Rs 11,200 (10,000 + 12% of 10,000). If you reinvest that Rs 1200 back into the same mutual fund and continue to earn an average annual return of 12%, your investment will be worth Rs 68,798 after 20 years.
The key to the magic of compounding is time. The longer you can keep your money invested, the more time it has to grow through compounding. This is why starting early and investing regularly is so important for building long-term wealth.
It's worth noting that compounding can work against you as well, such as in the case of high-interest debt. If you have credit card debt with a high-interest rate, the interest charges can compound over time and make it difficult to pay off the debt. In this case, it's important to focus on paying down the debt as quickly as possible to minimize the compounding effect of the interest charges.