One of the easiest ways to understand your investments is by calculating how many years it takes to double your money, as once you put a number to your estimates it becomes somewhat easy to take an investment decision. The thumb rule to calculate the same is very simple. You just need to divide 72 by the rate of return on investment.
For example: if your fixed deposit gives you an interest of 6 per cent then it would take 12 years to double your money. Compared this with a savings account and the period would be much higher. If your savings account gives you 4 per cent rate of interest then the money lying there would take 18 years. Now if you invest in mutual funds, at an average rate of 12 per cent the same amount of money would double in 6 years.
There is, however, one difference. While the rate of interest in fixed deposit and savings account is guaranteed, mutual fund returns are market-determined and subject to fluctuations. Having said that, you can now simplify an investment to an extent by understanding how many years it takes to double your money.
Another important thing to understand is the features of the product. Some products might promise you high return but you also need to understand the nature of the product. For example, fixed deposits are simple products but investment plans such as Unit Linked Insurance Plans (ULIPs) are complicated. You need to understand the nature of the product before investing in a policy.
Next time when an agent or a banker comes to sell you something do understand how many years it would take to double your money without missing out on the features of the product. Also, don’t get swayed by a very high return of a scheme or a policy. Always doubt the scheme when it is too good to be true.