By dividing 72 by the annual rate of return, investors can obtain a rough estimate of how many years it will take for their initial investment to duplicate itself.
New Delhi: As the cost of living is going up, people are looking to invest in instruments that will offer good returns and help their wealth grow quickly. A lot of people in India are risk-averse conservative investors which is why they look for investment options that offer guaranteed return. However, over the years that rate of interest of Bank FD and small savings scheme that offer guaranteed returns.
The government on Wednesday kept the interest rates on small savings schemes unchanged for the October-December quarter amid moderating bank deposit rates. Falling interest rates are making investors explore other investment options which may or may not be offering guaranteed. From mutual funds to PPF and FD, there are several investment options available. So, how do your pick one?
In order to pick the suitable option for you, you need to first decide your investment tenure and your financial goals. For instance, if you were investing in bank FDs for let’s say your child’s higher studies or marriage, you can pick Sukanya Samriddhi Yojana if you have a daughter or mutual funds or NPS Tier II. If you are looking to invest for your retirement, you can choose NPS, mutual funds or Kisan Vikas Patra (KVPs).
If you are still confused about which one to choose, you can look at the return differential to choose the one that offers the best returns in the least amount of time. The best way to do this is to find out how much time it takes for each investment instrument to double your investment. Selecting a scheme would be easier once you know which scheme will double your investments faster. You can do this easily by using ‘Rule of 72’.
What is Rule of 72?
The Rule of 72 in Finance is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can obtain a rough estimate of how many years it will take for their initial investment to duplicate itself.
How the Rule of 72 works?
The Rule of 72 states that Rs 100 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to Rs 100. In reality, a 10% investment will take 7.3 years to double. It is a fairly accurate measurement, and more so when using lower interest rates. It is typically used for situations involving compound interest. Note that a simple interest rate does not work very well with the Rule of 72.
Which investment instrument will double your money faster?
- Bank FD: Currently, Bank FDs are offering around 5% interest to investors. Going by this rate, it will take over 14 years for your money to double as 72/5 = 14.4
- PPF: PPF interest rate is 7.1% p.a. at the moment. Assuming PPF interest rate remains unchanged, it will take around 10 years for your money to double as 72/7.1 = 10.14.
- SSY: Sukanya Samriddhi Yojana interest rate at the moment is 7.6%. Assuming the interest rate remains unchanged in the future, it will take around 9.4 years for your money to double as 72/7.6 = 9.47.
- KVP: The current interest rate for KVP is 6.9% which is compounded annually. KVP promises to almost double your investment in ten years and four months. Applying the Rule of 72, it will take 10.43 years to double your money at the current interest rate of 6.9%.
- NSC: National Savings Certificates interest currently is at 6.8%. Assuming the rate remains the same in future as well, it will take 10.5 years for your investments to double.
- NPS: National Pension Scheme C, Scheme G of the Tier II account are giving on an average 11.5% returns in a period of a year. Assuming the performance remains the same in the future as well, NPS will take 6.2 years to double your investment.
- Mutual funds: There are multiple MF options available out there depending on risk tolerance, investment tenure and more. Short duration mutual funds and dynamic bond funds have been giving around 8.5% returns in the last one year. Assuming similar returns going forwards, it will take 8.4 years for your money to double. Debt medium to long-duration mutual funds, on the other hand, are offering around 8.7% returns p.a and it will take 8.3 years to double your investments.
It is worth mentioning here that the Rule of 72 is useful for financial estimates and understanding the nature of compound interest. You can also use this formula for expenses like inflation or interest as it applies to anything that grows, including population. The “rule” is remarkably accurate, as long as the interest rate is less than about 20 per cent; at higher rates the error starts to become significant.