You can invest your money in this mutual fund scheme, your money would double in five years – it is a common sales pitch employed by many mutual fund sellers. Well, you know that it is a bogus claim as mutual funds do not guarantee returns. The performance of a scheme depends on the performance of its investments. So, there is no way to find out when your money would double. However, if you are curious how you can quickly crosscheck the claim, here is some help.
One, the claim is mostly based on historical returns. As you would have heard repeatedly on mutual fund advertisements, past performance does not guarantee future returns; the schemes may or may not repeat the performance. Now, how would you verify whether the scheme would help you double the money in five years? Or in whatever time?
Here are some personal finance formulas you can use along with the historical returns of the mutual fund scheme/category to verify whether the money would indeed double, triple, quadruple.
Rule of 72
This rule estimates the number of years in which your investments would double. All you have to do is to divide ‘72’ by the rate of return. For example, anyone who has invested a lumpsum in a largecap mutual fund scheme can expect his investment to double in 3.5 years (72/20.55). Largecap mutual funds have returned 20.53 per cent in the last one year, but it is not necessary that it may repeat the performance next year and the year after that.
Although, Rule of 72’ is widely accepted and practiced, ‘Rule of 70’ and ‘Rule of 69’ can also be used in place of it to estimate the number of years required to double the amount of your investment. Some experts argue that Rule of 69 gives more accurate result, especially when the returns of the investment are compounded continuously. However, it doesn’t make a huge difference to the result.
Rule of 114
Similar to the rule of 72, this rule estimates the number of years in which your investments would triple. For example, if you have invested Rs 5,000 in a largecap mutual fund scheme, it would balloon to Rs 15,000 in 5.55 years approximately (114/20.55). That is, provided your investments continue to grow at 20.53 per cent per annum.
Rule of 144
This rule tells you the time in which your investment quadruple. Suppose you have invested Rs 5,000 in a multicap scheme. Using the formula, you can find out that your money would become Rs 20,000 in approximately 5.85 years (144/24.61). Multicap mutual funds have returned 24.40 per cent in the last one year.