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What Us The Rule of 72

16 Aug 2023

Introduction:

While doubling your money sounds like a challenging goal, it isn't impossible. Investing in the right investment avenue at the right time may help you achieve your desired financial goal.

However, how do you know how long to stay invested to achieve that goal?

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Here's an easy method to estimate the time it would take for your investments to double in value.

The Rule of 72

With the help of this rule, you can see how soon your investment doubles at a fixed rate of return.

Let's look at the formula for the rule of 72 

No. of years to double the investment = 72 / compounded annual rate of return

Example: 

Say you wish to invest Rs 100,000 in a hybrid fund with an annual average rate of return at 10%.

Applying the formula,

No. of years to double the investment = 72/10 – 7.2 years

You will need to invest for at least seven years to see your money double.

In the same way, if your chosen mutual fund scheme has a different annual return, here's how many years you may have to stay invested:

The compounded annual rate of return Applied formula No. of years to double the investment
6% 12 = 12 years
8% 9 = 9 years
12% 6 = 6 years

But how does this matter for someone who does not intend to double their investment specifically?

The time it would take to double your money helps estimate how soon you will have reached your desired portfolio size, even if you do not intend to double it.

However, the rule of 72 can also be used to determine the rate of return necessary to accomplish a specific financial goal in a particular period. Here's how -

Reversing Rule 72 

The formula is as follows:

Compounded annual rate of return = 72 / No. Of years to double the investment

Example:

Say you received a bonus of Rs 100,000, but you want to ensure this amount doubles in the next ten years. 

So, by reversing the rule of 72,

Compound annual rate of return = 72/10 – 7.2%

Now, every mutual fund scheme records a generalized annual rate of return. Using this formula, you can narrow your search for a mutual fund scheme with an annual rate of return between 7% and 8%.

Similarly, for the different investment time frames -

No of years  Applied formula Compounded annual rate of return
Six years 12 12%
Eight years 9 9%
12 years 6 6%

Conclusion

Using the rule of 72, you can determine the time it will take to double your investment. However, it is crucial to note that the rule estimates how long it will take for investments to double. That can be affected by other factors such as inflation, a change in the rate of return, or other economic factors. Therefore, the rule of 72 should not be considered a serious investment plan, and make sure you monitor your portfolio regularly.

 

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