This method provides an accurate measurement. It is more helpful when an investor uses lower interest rates rather than the higher ones. It is more used for situations which involve compound interest. The one which involves a simple interest rate does not work well with this method.
Rule 72 is considered as a good educational tool that helps investors to know about the impact of compounding on their wealth.
Also Read | Aggressive hybrid mutual funds deliver up to 55% return in one year. Should you invest now?
It is known that inflation reduces the purchasing power of money over time. The Rule of 72 also helps in calculating the effect of inflation on the investments. This method helps in calculating how much time it will take for a portfolio to double investments due to inflation.
How to calculate using Rule 72? Divide the rate of return by 72. For example, an investor invested Rs 2 lakh and around 9% rate of return is offered.
Rule 72 = 72/r
Where r is rate of return
Therefore, Rule 72 = 72/9
= 8 years
This indicates that it will take 8 years to double the investment.
The below mentioned helps you in determining how many years will it take to double your investments with different rate of return
Also Read | These 10 mutual funds together held over Rs 1 lakh crore cash in April
Alternatively Rule 72 can also be used to determine the rate of return. It means that it will help an investor to know the rate of return at which they will be able to double their investment.
Rule 72 = 72/t
Where t is duration of time
For example, if an investor wants to double their investment in 4 years, then what will be the rate of return?
Rule 72 = 72/4
= 18%
This indicates that if an investor wants to double the investment in four years, then they will earn an 18% rate of return.
The below mentioned table helps you in determining what rate of return you will earn at different time periods
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on [email protected] alongwith your age, risk profile, and twitter handle.