The Power of Compounding: 3 easy-to-implement rules to learn how a capital investment of Rs 3 lakh grows at a given rate of return over time.
The Power of Compounding: Patience is key when it comes to tapping into the true power of compounding. Three simple principles, rather formulas, can both provide clarity and help you estimate your return over time with a certain expected rate of return. These three rules are: Rule 8:4:3, Rule 72 and Rule 114. In this article, we will learn with examples how these rules can give you an estimate of how your total investment of Rs 3 lakh can grow. over time to some return.
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First, these rules are a combination of equations that yield general results based on certain fixed conditions. For example, the 8:4:3 rule is a time-tested strategy for measuring the potential growth of a mutual fund investment.
The 8:4:3 rule suggests that for a constant average annual return of 12 percent, your investment doubles in eight years, then again in the next 4 years, and finally in 3 years. So all in all, it tells you that your investment can quadruple in 15 years if you get a 12 percent annual return consistently.
So, if you are invested in an asset that yields at least 12 percent annual returns, a lump sum of Rs 3 lakh will grow to at least Rs 12 lakh at the end of about 15 years (8 + 4). + 3).
Rule 72
This rule simply estimates how long it would take for an investment to double at a given interest rate.
How to use
Simply divide 72 by the expected annual return to determine the number of years required for the investment to double in value from the original amount.
Suppose you invest Rs 3,00,000 at an annual interest rate of 8 percent. To calculate how long it takes for your investment to double:
72 ÷ 8 = 9 years
Your investment of Rs 3,00,000 will double to Rs 6,00,000 in about 9 years at a given rate of 8 percent.
Suppose you invest Rs 5,00,000 at an annual interest rate of 12 percent. To calculate how long it takes for your investment to double:
72 ÷ 12 = 6 years
That means your investment of Rs 5,00,000 will double to Rs 10 lakh in about 6 years.
The Rule of 72 provides an accurate way to estimate how long it will take your investment to double at a given interest rate.
Rule 114
Similarly, Rule 114 gives you a limited time required to triple your investment.
The user must divide the number 114 by the annual interest rate to determine the number of years.
What exactly is compounding and how does it work?
Compounding is something that involves adding interest earned periodically back to the principal, thereby improving your overall return significantly. Simply put, your investment grows exponentially with compounding as your accumulated interest helps you earn more interest, leading to incredible returns over time.
Think ‘interest for interest’. This is the best way to understand compounding, and the longer you wait for compounding, the more profitable the result. Under compounding, your interest is added incrementally to your principal periodically and earns interest at a higher rate than in the case of simple interest.
One can use these three easy-to-follow and easy-to-use rules to achieve significant growth and financial success.
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