Pond of Happiness (Bomb/Arrow Storage Capacity Upgrades)
In order to reach the Pond of Happiness you'll need the Zora's Flippers which allows you swim in deeper water. In order to acquire these you'll first need the Power Glove which allows you to lift light-colored large stones. The Power Glove is acquired from a dungeon in the Light World.
The Pond of Happiness is in the southeastern portion of the Light World and is located in the center of Lake Hylia. If you need help finding this location - I am standing just outside the cave on the map which is just above this paragraph. Click the picture to enlarge it if you need to.
Inside the Pond of Happiness you'll be asked to throw in some Rupees to increase your... Happiness. The real reason we're here is for when you throw in a total of 100 Rupees a Fairy will come out and ask you to make a wish! Your two options are you wish to carry more Bombs or you wish to carry more Arrows.
After you make your selection the fairy will grant you an upgrade to your storage capacity. That's great! But wait, that's not all! Every time you toss in another 100 Rupees the Fairy will come out and offer to increase either your Bomb or Arrow carrying capacity even further!
You can keep increasing how many bombs and arrows you can hold until you can carry 50 bombs and 70 arrows. After the first upgrade to your Bombs/Arrows each additional upgrade will only give you an additional 5 carrying capacity. That means this is going to take a whole lot of Rupees to complete!
Additional Note: After you max out how many Bombs and Arrows you can hold this Fairy tells you a big fat lie that you can increase your capacity further by visiting the Fairy at Waterfall of Wishing. Don't believe her!