To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.

Let us assume that someone invested ₹. 10,000 @ 8% p.a. The interest for the year would be ₹.800. However, when the interest is reinvested in the same investment, the earning next year would accrue on original investment of Rs. 10,000 as well as on the additional investment of ₹.800. This means, the earning for the second year would be ₹. 864. As the years pass, the interest for the year keeps increasing since there is additional investment each year.

How much money would be accumulated after a certain time period if the returns are reinvested? Let us see.

Investment:₹.. 1, 00,000
Rate of return: 8% p.a.