Romance with FD but Marry SIP

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Romance with FD But, Marry SIP

Imagine you are moving at 10 km per hour and your friend is moving at 11 km per hour.

After 6 minutes they are only 100 m (1/10th of 1km) apart which is not very significant. You can literally see each other.

After an hour you are 1 km apart. You can no longer see each other but still you aren’t all that far from each other. If you wish you can meet each other easily.

 

But after 10 hours you are 10 km apart and after 100 hours you are 100 km apart apart.

Now you are in two different cities. It’s too far to meet each other. Perhaps you have to speak over phone.

 

Likewise investing in a fixed deposit of 6% per annum or investing in a mutual fund of 10-15% per annum does not make a huge difference when invested for a period of 1 year or even for that matter for a period of 2 years.

However, if you were to invest for a period of 10 to 15 years, the difference in percentage is 4-9%  but final value is nearly 100-200% more.

Hope this explains why Equity mutual fund should be included in your asset allocation rather than keeping only Fixed Deposit in your portfolio. 😊

 

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Seek professional advice to mitigate such risks and make informed investment decisions. Numbers given in this article are for illustration purpose only.

The 8-4-3 Rule and The Snowball Effect

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The 8-4-3 Rule and the Snowball Effect

The 8-4-3 rule is a simple yet powerful concept that can help you visualize the exponential growth of your investments over time. But to truly harness its power, you need to understand the concept of the snowball effect.

The Snowball Effect

Imagine a snowball rolling down a hill. As it rolls, it picks up more snow, growing larger and larger.
Similarly, your investments can grow over time, picking up more returns as they compound.
As per this thumb rule, the first 8 years is a period where money grows steadily, the next 4 years is where it accelerates and the next 3 years is where the snowball effect take place.
When you combine the 8-4-3 rule with the snowball effect, you create a powerful force for wealth creation.
For Example
Assume, one having monthly salary of 1.5 Lakhs and he invest 45K( 30% of income) in SIP.
Assume 12% return.
In First 8 years, investments will reach to 72Lakhs
Next 4 years, investments will reach to 1.45 Cr
Next 3 years, investments will grow to 2.27 Cr
Illustration of Snowball effect in Investments

**How to Make the 8-4-3 Rule Work for You**

1. Start Early: The earlier you start investing, the more time your money has to grow. Even small, consistent investments can yield substantial returns over the long term. Aim for investing at least 20-30% of monthly income.
2. Choose the Right Investments: Equity mutual funds are a great option for long-term wealth creation. They offer the potential for high returns, but also come with higher risk. Hence, asset allocation plays a vital role.
3. Stay Disciplined: Stick to your investment plan, regardless of market fluctuations. Consistent investing is key to reaping the benefits of compounding.
4. Review and Re-balance: Regularly review your portfolio to ensure it aligns with your financial goals and risk tolerance. Re-balance your portfolio as needed to maintain your desired asset allocation.

By understanding the 8-4-3 rule and the snowball effect, and by taking action early, you can set yourself up for a financially secure future.

Remember, every small step you take today can lead to significant rewards in the future.
Although investing poses risks, such as market declines, not investing also can be a risk to your financial future.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Seek professional advice to mitigate such risks and make informed investment decisions. Numbers given in this article are for illustration purpose only.

The Rule of 72: A Simple Guide to Understanding Investment Growth

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The Rule of 72 is a handy mental math tool that can help you estimate how long it will take for your investment to double in value. It’s a simple formula that can be applied to various investment scenarios.

How Does the Rule of 72 Work?

The rule states that if you divide the number 72 by the annual interest rate (expressed as a percentage), you’ll get an approximate estimate of how many years it will take for your investment to double.

For example, if you invest at a 6% annual interest rate, dividing 72 by 6 gives you 12. This means that your investment will likely double in value in approximately 12 years.

Calculation Examples

Let’s explore a few examples to illustrate how the Rule of 72 works:

  • Example 1: If you invest at a 4% annual interest rate, how long will it take for your investment to double?
    • 72 / 4 = 18 years
  • Example 2: If you want your investment to double in 10 years, what annual interest rate do you need?
    • 72 / 10 = 7.2%

Factors Affecting the Rule of 72

While the Rule of 72 is a useful approximation, it’s important to note that it’s based on a simplified model and doesn’t account for factors like compounding frequency or taxes. For a more accurate calculation, you might need to use a financial calculator or consult with a financial advisor.

The Rule of 72 in Action

The Rule of 72 can be helpful for:

  • Understanding long-term investment growth: It can provide a quick estimate of how your investments might grow over time.
  • Comparing different investment options: You can use it to compare the growth potential of various investments.
  • Setting realistic financial goals: It can help you determine how long it might take to save for specific goals, such as a down payment on a house or retirement.

By understanding the Rule of 72, you can make more informed decisions about your investments and plan for your financial future.

The Power of Compounding: A Simple Concept with Extraordinary Results

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What is Compounding?

Compounding, often referred to as the “eighth wonder of the world,” is a simple yet powerful concept. It’s the process of earning interest on both your initial investment and the accumulated interest over time. In essence, your money grows exponentially, not linearly.

The Magic of Time

Time is the key ingredient in compounding. The longer you allow your money to grow, the more significant the impact of compounding becomes. Even small amounts invested consistently over a long period can yield substantial returns.

Example: The Penny Doubled Daily

Imagine starting with a penny and doubling it every day for a month. While it may seem insignificant initially, by the end of the month, you’d have over $10 million! This illustrates the incredible power of compounding when given enough time.

The Rule of 72

A useful rule of thumb for estimating how long it takes for your money to double is the Rule of 72. Divide 72 by the annual interest rate (expressed as a percentage) to find the approximate number of years it will take for your investment to double. For example, at a 6% interest rate, it would take approximately 12 years for your money to double.

The Importance of Starting Early

The earlier you start investing, the more time compounding has to work its magic. Even small amounts invested consistently over a long period can accumulate significantly. This is why starting early is often emphasized in financial planning.

Overcoming Obstacles

While compounding is a powerful tool, it’s not without its challenges. Factors such as market volatility, inflation, and fees can impact your returns. It’s essential to invest wisely, diversify your portfolio, and stay disciplined to maximize the benefits of compounding.

Conclusion

Compounding is a simple concept with extraordinary potential. By understanding its power and taking advantage of it through consistent investing, you can significantly improve your financial future. Remember, time is your ally. The earlier you start, the more you can benefit from the magic of compounding.