Experience the power of compounding: Follow 4 easy rules for effortless long-term mutual fund planning
Learn how the power of compounding can help investors build wealth through mutual fund investments. Understand how the 8:4:3 rule and Rule of 72 can strategically help investors plan for long tem financial growth.
Compounding is one of the most powerful concepts in wealth building. By following simple rules, anyone can maximise returns and achieve long term financial goals effortlessly. Here, we will break down 4 straightforward strategies to help you understand the true power of compounding. Irrespective of the fact that you are a beginner or a seasoned investor, these rules will make it easy for you to plan and grow your investment over time.
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Power of compounding
Compounding interest helps your money grow faster by earning on both your original amount and the interest you’ve already gained. For example, if you start with Rs 100 and earn 10% interest, you’ll have Rs 110 after one year. The next year, you earn interest on Rs 110, growing your money even more, and this keeps adding up each year.
What is 8:4:3 rule?
The 8:4:3 rule helps investors see how their mutual fund investments can grow over time. With a 12% annual return, your investment could double in about 8 years, double again in 4 more years, and triple in the following 3 years. This rule shows how compounding can multiply your money over the long term. Applying the 8:4:3 rule means that your mutual fund investment will quadruple over 15 years and increase eightfold in 21 years.
The Rule of 72: How Will Your Money Grow?
The Rule of 72 is an easy way to estimate how long it takes for an investment to double. Just divide 72 by your annual interest rate; for example, with a 10% rate, 72/10 gives 7.2 years. So, if you invest Rs 1,00,000, it can grow to Rs 2,00,000 in about 7 years.
How does power of compounding works in investment?
The interest is first accrued on the initial deposit amount, as tenure progresses the initial deposit amount increases. The initial deposit is now considered as the principal amount plus the interest accrued.
What is power of compounding in mutual funds?
Power of compounding in mutual funds can help investors achieve their financial goals faster. It allows the investors to earn on both their original investment and the gains it has accumulated. With systematic investment plan (SIP), investors can invest a fixed amount at regular intervals such as monthly, quarterly or semi annually and those returns are reinvested to generate even more returns over time.
Benefits of power of compounding
Higher returns over time
Exponential growth
Minimal effort, maximum gain
Power of investing early
The earlier you invest, the more time your money has to grow through compounding. Even small contribution can turn into substantial amounts over the years. Investing early allows investors to build their wealth gradually, reducing the need to save large amounts later in life. For example, investing Rs 5,000 monthly from age 25 can result in over Rs 1 crore by age 60.
Power of compounding: Tripling your investment
The Rule of 114 is a straightforward formula that helps investors determine how long it will take for an investment to triple. Simply divide 114 by the annual interest rate to determine the number of years.
Power of Compounding: Quadrupling your investment
The Rule of 144 provides a similar method for calculating how long it will take to quadruple an investment. Divide the number 144 by the expected return and the result will be the number of years required to reach your goal of quadrupling your money.
Power of Compounding: Putting it into practice
You can use these rules to grow your money and achieve financial success. By being consistent with your investments and seeking expert advice, you can make the most of your mutual fund investments.