Sunday, April 5, 2009

HOW MUCH TIME WILL IT TAKE FOR MY INVESTMENT TO DOUBLE?

Most of us have a goal of seeing our money double in value in shortest possible time. There were few investment options which were sold on the premise of doubling one's investment in a fixed period of time. Needless to say these were very popular investment options.These days we have lot of investment plans on offer in the market but they don't indicate the time it will take to double your money in them.This is more true for investment plans having equity portion as well in them.But, if want to find out how much time will it take to double our money what should we do ? The answer to this is the simple "Rule of 72".

What is Rule Of 72? Rule of 72 states that to find out the number of years in which an investment will double , one needs to divide 72 by the indicated rate of return one will get on that investment. The result will be the time period required for the money invested to double in value. It works for compounded rate of return and not simple rate of return.
So for example, if you invest in a Fixed Deposit with State Bank Of India which gives annual rate of interest of 9%, then the number of years your investment will take to double will be (72/9)8 years.
How accurate is this rule? This rule is an approximation of the time taken for an investment to return double the money invested in it, but, the margin of error is negligible and to that extent it gives a fairly correct answer.
Does it work in all situations? Yes and No. It will work in all the situations , but, it works best for finding out the time taken for doubling the money at an interest rate band of 6-10%. Beyond that the margin of error starts increasing. But still it does give you a fair idea.
Whats the alternative? Wherever you are dealing with interest rates in excess of 10% and you want the exact time required for money to double, in that caseyou may use The Rule 69, rather than rule of 72.In Rule of 69 , divide 69 by the rate of interest and you will get the exact time period.
What about time taken for equity investments to double? We all know that equity as an investment class does not guarantee any fixed rate of return and as such the rule of 72 wont help you find out the time taken by your investment in equities, to double.It works well for investment plans where the rate of return is fixed like FD, PPF, NSC etc.
So next time when you are putting your hard earned money into any debt based investment plan, make that plan pass this rule of 72 test.

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