Compounding is the process of earning returns on past returns. Compounding power is strongest when you start early, invest regularly, and use tax-efficient instruments. Below are the top practical ways to build wealth, plus how to combine them.
Top compounding routes: what they are and why they work
1. Equity mutual funds (SIP): Systematic Investment Plans let you rupee-cost-average into equities. Over long horizons of 7–15+ years, diversified equity funds historically deliver 10–15% p.a. or more which is a great way to compound your wealth.
2. Direct equity: Can deliver higher returns but is higher risk and needs time & skill. If you can do lots of research and keep traxck of new developments, can read technicals of a stock and keep track of fundamentals that affect the growth and earnings of a company, it’s Industry, government interventions, company’s managemen and various other ascpects, you can allocate small capital towrads direct equities for long-term compouding.
3. Public Provident Fund (PPF): Government backed, safe, tax-free compounding (Exempt-Exempt-Exempt) with fixed rates which can vary annually or querterly by the Government Of India. Ideal for conservative long-term investors and there’s a lockin of 15-years.
4. Employee Provident Fund (EPF): High-savings discipline for salaried people; offers steady compounding and tax advantage
5. National Pension System (NPS): Encourages retirement investing with a mix of equity & debt; however, this comes with certain taxation.
6. Sukanya Samriddhi Scheme: Attractive fixed returns for girl child education/marriage, tax-free
7. Sovereign Gold Bonds (SGBs): Offer coupon plus price appreciation, diversifies and compounds when gold rises in value.
8. Real estate / REITs: Long-term capital appreciation and rental yield can compound, but real estate is illiquid and location dependent.
9. Corporate bonds / FDs: Lower risk and lower returns; useful for capital preservation and predictable compounding.
How to structure for compounding
– Start early: Time is the biggest multiplier.
– Use SIPs for equities if you don’t have lump sum—regular contributions exploit compounding and rupee-cost averaging.
– Reinvest dividends/interest wherever possible to compound.
– Use tax-efficient options: ELSS (equity tax saver), PPF, NPS, SGBs (if held to maturity) to keep more of your gains compounded.
– Maintain an emergency fund (liquid) so you don’t derail compounding by forced withdrawals.
– Rebalance annually to maintain desired equity/debt mix.
Sample allocation ideas
– Age 20–35: 70–90% equity (SIP + some direct) | 10–30% debt/PPF/EPF
– Age 35–50: 50–70% equity | 30–50% debt/PPF/FDs
– 50+: 30–50% equity | 50–70% debt/PPF/FDs
Quick compounding example (illustrative)
Monthly SIP Rs 10,000 for 20 years:
– At 12% p.a. ≈ Rs 99.9 lakh
– At 10% p.a. ≈ Rs 76.6 lakh
– At 8% p.a. ≈ Rs 59.2 lakh
Compared to monthly FD-like return (6.5% p.a.) ≈ Rs 49.3 lakh
This shows higher equity returns amplify compounding, but with higher volatility.
Key risks & tips
– Higher returns = higher volatility. Keep horizon long (5–15+ years) for equities.
– Diversify across assets to reduce concentration risk.
– Keep costs low: prefer direct mutual funds or low-cost fund options.
– Review tax implications (LTCG, STCG, TDS rules) when withdrawing.
