Where is compounding the invested capital applicable w.r.t stocks?”

A. In the case of stocks and mutual funds investment, there is no concept of principal and interest.

So why do we say it is compounding?

Because the rate of growth is measured in compounded returns.

So, if you treat your initial investment as ‘principal’ and then calculate the returns over the years, you will see a compounding effect.

Let’s say you invested Rs 1 lakh in a mutual fund. In 5 years, it became Rs 2 lakh.

If you calculate the per-year returns of this growth, it will come to 14.87% compounded annual return.