Compounding returns refer to the process where the returns on an investment generate their own returns over time. This means that not only do you earn money on your initial investment, but you also earn money on the returns that accumulate. For example, if you invest in a stock or a mutual fund, the profits you earn can be reinvested, leading to exponential growth. The power of compounding becomes more significant over longer periods. Even small amounts can grow substantially due to the effect of compounding. This is why starting to invest early can be beneficial, as the longer your money is invested, the more it can compound and increase in value.