The power of double - Rule of 72

No, we are not offering any dubious scheme here, which can double your money in 28 days or three to six months. Tempting as they may sound, such schemes generally do not work.

Instead, let’s discuss a basic and well-known adage about investing – the rule of 72.

Simply explained, this rule of 72 gives you an estimate of approximately how many years it will take for the value of your investment to double.

So how does it work?

One must divide the number 72 by the fixed annual interest rate at which they are investing the funds, and the answer will be the number of years it will take to double these funds.

So if you are investing funds at 9% annually, it will take about eight years for your funds to double. This is because 72/9 (rate of interest) = 8 (years).

If you are investing funds at a higher rate – say 12%, it will only take 6 years for your investments to double. Similarly, at a significantly lower rate of interest, say about 4%, it will take as much as 18 years for the funds to double in value.

The rule of 72 helps in making a basic estimate about the growth trajectory of your investments, and as such, can be used as a starting point.

One thing to remember though is that here, the interest rate is assumed to be compounding annually, and is not simple interest.

Also, when the rule of 72 was derived, the actual number to be used for dividing the interest rate was 69.3. However, because this number would be tricky as a dividend, 72 is generally used in the formula.

We will talk about more of such concepts in personal finance, and till then, happy investing!

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This article is for information purposes only. The information provided herein is derived from public sources, believed to be from reliable sources. However, no representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. Views expressed herein involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. Kotak Mahindra Mutual Fund/ Kotak AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in future. Readers should seek professional advice before taking any investment-related decisions and alone shall be responsible for any decision taken.