Investors need to know some rule of thumb, so as to do quick calculations when necessary. So Regrob presents a mathematical trick to make your calculations of rate of return faster.
Real Estate agents also need to be quick on calculations part while comparing their proposals to financial products. Clients like it when their financial or real estate consultant gives them quick calculations to measure returns.
The rule of 72 will allow us to determine, how long will it take for an investment to double given a specific rate of return. The rule work as follows :
Divide 72 by the rate of return and the result will be an estimate of the number years it take to double your investment .
As an example , let’s say that you are receiving an 9% return by investing in a diversified portfolio :
So an amount of money invested at 9% will double every 8 years. Someone who invests Rs 10,00,000 in 2015 with an 9% return will have Rs 20,00,000 in 2023.
Let’s try the same thing with a 15% return.
72/15 =4.8(Let’s round it to 5)
So if the same investor were to invest Rs 10,00,000 in 2015 with 15% return , he would have Rs 20,00,000 in 2020.
We know from The Rule of 72 that if we divide 72 by the rate of return, we get the number of years to double an investment. It also works the other way — by dividing 72 by the number of years to double, we can get the rate of return.
In this case we can divide 72 by 3 , which gives 21 . This is the rate of return (21%) , which we need to double our money every three years . Thus we need 21% return rate if we want to convert Rs 10 crore into Rs 20 crore.