When I say that your stock investing will grow by 12% every year, then you will understand the magic of compounding. But what does it even mean? In this article, I will show you how compounding works in real life—using an Excel sheet!
Friends, in this article, I will try to go into the details of compounding.
One of the biggest problems with compounding is that we oversimplify it. I am guilty. Very often, I tell you that if you invest ₹500 every month in your 20s, then just wait and watch—when you are 50–60 years old, your money will be in crores.
Why? Why is that? Because of compounding.
And then you say, “Yes, but what is it exactly?
How does compounding even work?
What is the basic form of compounding that we see in real life, especially since the stock market is fluctuating all the time?
Then what is it that is compounding?”
I will clarify all that in this article using an Excel sheet and going deep into it.
What is compound interest and why is it magical?
Friends, the basic fundamental of compound interest is that you are growing at a certain rate, but the biggest difference is that the growth rate is applied to a new base each time.
What does that mean? You started with ₹100.
Let’s say your growth rate is 10%. So, in the first year, you had ₹100, and at the end of the year, you got a 10% return—so now how much do you have? ₹110.
Now, in the next year, when you get another 10% growth, that will be on the new base of ₹110. It will not be calculated on ₹100 anymore, but on ₹110.
This means your money grew by 10% again, but instead of ₹10, you earned ₹11 this year. So now your new base is ₹110 + ₹11 = ₹121.
Now again, in the next year, you grow by 10%. The growth rate remains the same, but the base changes. Now you will earn 10% on ₹121, which is ₹12.1, and that means for that year, your total becomes ₹121 + ₹12.1 = ₹133.1.
And so on and so forth…
If you look at it every year, your growth rate remains the same—10%—but your earnings are increasing.
In the 1st year, you earned only ₹10.
In the 2nd year, you earned ₹11.
In the 3rd year, you earned ₹12.1, and so on.
Let’s Visualize Compounding in Excel
If I try to show this in an Excel sheet, how will it look?
So we started with ₹100 and had a growth rate of 10% every year. We’ll do this twenty times.
In the first year, how much did you grow? ₹100 × 10% = ₹10.
After this growth, how much do we have? ₹100 + ₹10 = ₹110.
Now we start the next year with ₹110. So if we take growth on this, see what happens—Wow! Magic!
Your investment grew by only 10%, but your base increased from ₹100 to ₹110, and that’s how your money compounded:
Year 1 – ₹10
Year 2 – ₹11
Year 3 – ₹12
Year 4 – ₹13
Year 5 – ₹15
Year 6 – ₹16
Year 7 – ₹18
Year 8 – ₹20
Year 9 – ₹21
…and so on.
Now let me take this up to 45 years.
Let’s plot this curve and see what happens.
Let me try to stretch it further—we’ll take it up to 200.
This is what it looks like now.
I wanted to show you the difference between these two charts.
When I plotted the curve for 45 years, it went like this. This is called an exponential curve.
You can see that it’s growing steadily every year, and it reaches a very high point.
If I do the same thing for 200 years, for the longest time—almost until 125–129—it seems like it’s not growing at all. It’s absolutely flat at first, and then it takes off at super speed.
That’s the exponential power of compounding.
Why Compounding Feels Slow (At First)
If you’re in your 20s like me, and I tell you to consistently invest ₹500–₹1000 every month, you won’t feel the power of compounding for a long time.
For the first 10 years, it will feel like a flat curve.
You’ll be growing every month, but it won’t feel like much. Only after 15–20 years will you see a big jump—it will blow your mind.
Why? And this is the second important part of compounding.
Because your growth rate—in our case, 10%—doesn’t depend on your base.
No matter how big your base is, if you can earn 10% on it, you’ll earn that much more.
What does this mean?
You bought stock worth ₹100 and got 10%—so you earned ₹10.
Now you invest more and have stocks worth ₹1 lakh. If it grows by 10%, you earn ₹10,000.
Now suppose you have ₹1 crore worth of that same stock—it will still grow by 10%, giving you ₹10 lakhs.
The same stock grows by the same rate for everyone—10% for small or large investors.
And this growth will keep compounding.
Now this may sound theoretical. What happens in real life?
That’s what I wanted to show you with actual data—to prove that this theory reflects reality, even if the experience feels different.
Let’s see.
Theory vs. Reality: What Happens in Real Life?
So friends, you can see a little intimidating Excel sheet on the screen—but it’s the most important Excel sheet to understand compounding.
These are the returns of the Nifty (the National Stock Exchange) month-by-month from the year 2000 to 2020.
This shows how much return Nifty gave every month for 20 years.
This is not for a specific stock but for the entire index—likely Nifty 50.
You’ll see color-coded cells for good and bad months.
For example, in the year 2000:
- January: +4.44%
- February: +7%
- March: -7.64%
- April: -7.98%
- May: further down
- June: up
- July: down
- August: up
…and so on.
This is how the market behaves. It’s never a straight line.
The beautiful chart I showed earlier is not real life—real life is very different.
Despite that, compounding still works—and I will show you how.
This is the annual return, meaning if you had invested at the start of the year, this is how much return you would have had by the end of that year:
- 2000: negative
- 2001: negative
- 2003: +71%
- … and so on.
Let’s go through an example.
Real-Life Example: ₹10,000 Invested in 2000
Suppose you invested ₹10,000 in January 2000.
At the end of February, it became ₹10,702—a growth of 7.02%.
In March, it dropped to ₹9,884 (a -7.64% drop).
Then ₹9,100
Then ₹8,900
Then up, then down again… and in December 2000, you were at ₹8,170.
In January 2001, it rose to ₹8,870 due to an 8.56% increase.
This is how I calculated all the numbers—simple Excel logic.
After doing all this, and looking at the annual returns:
-14%, -16%, +3%, +71%, +10%, +36%, +40%, +54%, then a -51% crash in 2008, then +75%, +17%, -24%, +27%… and so on.
After doing all of this, the ₹10,000 you invested in June 2000 is now ₹92,664.
CAGR: The Simplified Version
Let’s calculate the Compound Annual Growth Rate (CAGR):
CAGR = (Ending amount / Starting amount) ^ (1/Years) – 1
= (92,664 / 10,000) ^ (1/20) – 1
≈ 11.78%
This is the key point:
Someone might simplify this and say, “Your ₹10,000 grew at 11.78% annually.”
But in reality, it fluctuated all the time—₹8000, ₹6000, ₹12,000, ₹25,000—before reaching ₹92,664.
The correct way is this:
Start with ₹10,000
Add 11.78% return annually
Keep compounding
Eventually it reached ₹92,664—the same figure.
This is the reality.
When you invest in the stock market or any risky asset, it goes through ups and downs.
Smooth Curve vs. Real Curve
You may see charts in investment videos showing a smooth curve:
₹10,000 → ₹11,178 → ₹12,494… and so on.
But in reality, your money won’t grow in a smooth line.
It will look choppy—but will ultimately reach the same destination.
And that is the difference, my friends.
One curve is smooth and always increasing.
The other is volatile—but reaches the same point.
So when you think about compounding, understand that the magic lies in enduring the uncertainty.
This is why I repeatedly tell you:
Do not expect a smooth curve.
Don’t assume that your stock investments will grow the same way every year.
Just because the Excel sheet assumes a 12% annual return, that doesn’t mean it’ll happen
like that.
The Real Magic: Staying Invested
You just have to stay invested.
Don’t extect a 12% return every year.
don’t panic during the market ups and downs.
Just keep going.
And that is how compounding will ultimately work for you.
Final Words
I hope this was useful.
I hope many people read this. If you benefited from it, please share this article In your circle and comment—because That’s how more people will understand the true nature of compounding.
The Excel sheet is pinned here.
If you have any other questions, please ask me. It will be a pleasure to help you, my friends.
Credit:
I took inspiration and ideas for this article from Ankur Warikoo sir’s videos. You should definitely check out the original video here:
