Unlocking the Power of Compound Interest: The Rule of 72 Explained by Udayan Adhye

The Rule of 72 is a simple yet powerful concept in investing that can help you understand the potential of compounding and plan your financial future effectively. Udayan Adhye, a renowned finance content creator, sheds light on this concept, emphasizing its importance in mastering the art of investing through the power of compounding.

Understanding the Rule of 72:

The Rule of 72 is a mathematical principle that helps investors determine the number of years it will take for an investment to double in value, given a fixed annual rate of return. The formula is simple: divide 72 by the annual rate of return (in percentage) to get the number of years it will take for the investment to double.

Applying the Rule to Index Funds:

For example, if you invest in an index fund that yields a 12% annual return post-tax, which has been the case in the Indian stock market, your investment will double every 72 divided by 12, that is, in 6 years. This demonstrates the potential of index funds to grow your wealth over time.

The Magic of Compound Interest:

The true magic of the Rule of 72 lies in the power of compound interest. If you invest Rs. 10 lakhs today in an instrument with a 12% annual return, your investment will grow to Rs. 20 lakhs in 6 years, Rs. 40 lakhs in 12 years, Rs. 80 lakhs in 18 years, Rs. 1.6 crores in 24 years, and Rs. 3.2 crores in 30 years. This exponential growth highlights the importance of starting your investment journey early and staying invested for the long term.

Comparing with Fixed Deposits:

In contrast, if you invest in a fixed deposit (FD) that offers a post-tax annual return of 6%, which is a generous estimate, your investment will double every 72 divided by 6, that is, in 12 years. This slower growth rate underscores the impact of lower returns on your investment's growth potential over time.

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The Rule of 72 is a valuable tool for investors to quickly gauge the doubling time of their investments and make informed decisions. By understanding and leveraging the power of compounding, you can significantly enhance your financial growth. As Udayan Adhye highlights, embracing this rule can be a game-changer in mastering your investing journey and achieving your financial goals.