Recurring Deposit & Law of Compounding & Rule of 72 Explained In Nepal

Namaste everyone!!

Our Nepali bank has offered different schemes to us. Some of them are:
"Double your investment in just 2 years."
"Get a 10x return on your investment in just 5 years."

These types of various schemes are being offered to us. So, We being the students of finance,

We must comprehend the underlying meaning of these schemes.

Are they as good as they've been said to be?

Without focusing solely on the headlines of 2x, 5x, 10x, ... returns,
These kinds of headlines do catch our attention.
We can simply understand it as a marketing scheme.
But,
What are the features of these schemes?
Should we proceed or not?
Are they as unbelievable as they've been said to be?
Let's try finding its depth in today's article.
To understand these schemes, there are some concepts which are popular in the financial world,

If these concepts are a little bit clear, then we can easily understand all these things.


Prior to comprehending all of this, there is a popular concept in the financial world.

If you use that your calculation can be done quickly. So that type of calculation is frequently in use in real life.

There is a calculation to determine how long it takes to double our investment quickly. Without using a log calculator or compound interest formula, 

To calculate quickly, there is a concept in the financial world,
which is called "The Rule of 72"

"The Rule of 72" helps to calculate the time instantly required to double your investment.

If I got a certain interest from my investment, and if I keep re-investing it without withdrawing, which is also called compounding.
It is the process of reinvesting earned interest.

So, that is called compounding.

We can instantly calculate the time required to double our investment at a given rate of interest. So. How do you do that?

Divide your annual rate of interest by 72.

The resultant figure is the no. of years it will take for your money to get doubled. Let's suppose,

The interest rate you're getting is 10%. If you invest it in a compounding manner,

How long will it take for your investment to be doubled? It's simple.
Dividing 72 by 10.
It's 7.2 years.

So ...

                                 

In 7.2 years, your investment will be doubled.
If you invest 1 lakh, you'll get a return of 2 lakhs.
If you invest 5 lakhs, you'll get a return of 10 lakhs.
If you invest 10 lakhs, you'll get a return of 20 lakhs.

Likewise,

If you get a higher interest rate,
Let's suppose, you got 12%.
So... how should we divide?
72 divided by 12 is equal to 6 years.
So... Your investment will be doubled in 6 years if you've got an interest rate of 12%.
Similarly,

If you get an interest rate of 8%,
72 divided by 8 is equal to 9 years.
Your investment is said to be doubled in 9 years.

So...
Neither we need a calculator nor we use the compound interest formula.

It is usable if you require it quickly. But. if you want exact calculation, You must use a formula.

The required years and even months can be precisely calculated using a formula. But If you want to find the approximate years required to get your investment doubled,

This "rule of 72" can be very useful.

The next rule is:

"Rule of 114"
This rule specifies the time required to triple your investment.
-By "Rule of 114"
Previously "Rule of 72" specifies the time required to get your investment doubled.
This "Rule of 114" specifies the time required to triple your investment. Let's take the previous examples.

With a 12% rate of interest, If you're compounding your capital by investing. If you applied "Rule of 114",

Dividing 114 by 12, we get So... In Nine and half years, Your investment will have a threefold return.

So...Previously, how many years do you need to double your investment with a 12% interest rate?

By following the "Rule of 72"?
- It has taken six years.
Now, how many years do you need to triple the same investment?
Dividing 114 by 12, we get, 9.5 years.

So, double in six years. Threefold in 9.5 years.

Similarly,

There is the next rule:

"Rule of 144"
What does it specify?

Previously, I have talked about doubling and tripling the money.
This "Rule of 144" is used to specify the time required to get four times of your investment.

So... if you have made an investment at the rate of 12%,
When will you see a four-fold return on your investment?

Dividing 144 by 12, we get,
-You will see a four-fold return on your investment in 12 years.

Similarly,

There is one more important rule that everyone should be aware of.
That rule is:
"The Rule of 70"
This rule specifies that if the current inflation rate of your country,

As previously, we need a rate of interest to find out the number of years.

Similarly, the inflation rate is required in this case.
What is the inflation rate of the country you're residing in?
Let's suppose the inflation rate is at 7%.
That means.

"Rule of 70" specifies that...

If you divide 70 by the inflation rate, If you make no investment within the resultant years, If you simply keep your earned money without making any investments,

Dividing 70 by 7, we get, 10 years Within 10 years, if you sit without investing a single penny,

Then the value of that money will drop by 50%. So... if you currently have Rs. one lakh,

If you're sitting making no investments, and if the inflation rate is 7%,
The value of Rs one lakh will drop to 50 thousand.

You won't be able to purchase goods worth one lakh at that time.
That's why,

It is always advisable to invest your money. What is the appropriate rate to target for?

If you make an investment that yields a higher return than your country's inflation, Then only you'll be making use of the money.

That's why we should always invest above the rate of inflation in any country.

These were all the rules.

It is extremely useful in real life if remembered.

Let's talk about another concept.

The name of the concept is... - Recurring Deposit.
The term itself speaks up. "Recurring Deposit."
It means...
Something that happens again and again and must be continued. It is a Recurring deposit.

Most of us know about savings accounts and fixed deposits, but very few know about Recurring.

What is there in Recurring deposits? Every time a certain amount must be deposited at a specific time.

Now If you have a lump sum of 5 or 10 lakhs, Then you can invest it in a fixed deposit. What if you're employed,

However, you do not wish to invest in the stock market or any other field. You just want to save your money.

       

If you feel banks are the safest option to save and invest in, ...
you want to do savings every month.
For example,
If you earn 50k monthly, If you commit yourself, "I will save Rs. 10,000 per month."

Then you can open a fixed deposit account, which is called a "Recurring Fixed Deposit". In which You can set a date to keep saving your 10k monthly immediately after receiving your salary.
This is a fixed deposit. You can't withdraw.

You must determine the no. of years or months, you're investing for.
And till that duration, you must keep investing, selecting the mode of installment.

You can withdraw the lump sum amount after 4 or 5 years by regularly investing 10k every month. This is what a "Recurring deposit" is.

This is best for salaried- employed, who knows the salary-receiving date. You can immediately save it after receiving it.

First you can deposit an amount on the "Recurring deposit".
Then you cover the expense with the remaining amount.
We can use it for a saving habit.

The one who can't invest a lump-sum amount in the fixed deposit can use it.

There will be a lump-sum at the withdrawal time even if you invest a tiny amount regularly.

For those, it is critical to understand the term "Recurring deposit."
Finally, let's talk about the various schemes of these banks.

The schemes that are shown above claim to give 2x, 5x, 10x, ... returns.

These are all the schemes being offered by the different banks.
The concepts that we read just before;

"Rule of 72"
Yes?
"Rule of 114"
And... "Rule of 144"
Observe it by implementing these rules on these schemes.
How long does it take to double your investment? What is the required interest rate?

Are these schemes offering the same interest rate?
- They aren't offering
That means ...

What are all these?
If you understand thoroughly,
then these all schemes are Recurring deposits.
That's why,

Previously, I made it clear to everyone about Recurring deposits.
So, just because you invested one lakh here doesn't mean it will be doubled in two years.

If you begin to understand these schemes, then you'll get to know that...

If you have deposited one lakh, then you should pay 10% of it each month. So... if you have initially deposited 1 lakh, then you need to pay 10% of it in a subsequent month.

It means...
If you have invested 1 lakh, Then you need to deposit 10k in the next month. Again,

In the second month, you need to deposit next 10k. Again, In the third month, you need to deposit another 10k. If you regularly deposit Rs. 10,000 every month for the next two years, then it will be doubled in two years.

Let's see how it is calculated in a simple excel sheet. However, I won't mention the names of any banks here. 

But... Let's consider that this bank is offering you a scheme of five times return on your investment in the next 2.8 years.

How does it work? Let's suppose you have invested one lakh,
Then in your first month, 

There will be a total of 110k after investing immediately at the end of the first month.

Yes?

After your 110K investment, how much interest did you get?
Let's suppose, Currently, the majority of banks are providing interest rates of more than 12%.

So, If I consider a 12% interest rate,
Your interest would be Rs. 1100.
Yes?

There will be a total of 120k after investing immediately 10k in the second month.

Because you have invested 100k, 10k and 10k... so the Total is equal to 120k.

You got an interest of Rs 1200 each month. Again, if you invest 10k in a subsequent month, You will make a 130k investment.
You received interest of Rs. 1300.

The banks used to give quarterly interest. Let's suppose you got Rs 3,600 by adding all those three. Yes?

So.. by calculating like this, in 2.8 years, which is equivalent to 31 months, You will have invested 410k by 31 months if you regularly invest 10k each month.

If you add, how much interest did you get?
- You received Rs. 84,600 as interest.
So...

You have deposited a total of 410k on your own. And... You received Rs. 84,600 as interest.

Totalling it all, you get Rs. 4,94,600. But you're promised to receive 500k at the end.

According to my calculation, you'll receive Rs. 4,94,600 with a 12% interest rate. But perhaps the bank has considered more than a 12% interest rate, so you will receive 500k.

So... The point that you must understand is that.. you're not receiving 5 lakhs by investing only 1 lakh.

It's a Recurring deposit, so by investing one lakh, you must consistently deposit 10% of your initial investment each month.

For e.g. If you have invested 10 lakhs, you must deposit 1 lakh each month.

If you have invested 5 lakhs, you must deposit 50,000 each month.
In this way, you'll receive interest by depositing the amount continuously each month.

With a consistent deposit and interest, you will receive five times your investment.

You must comprehend how this scheme functions. Being a financially literate person,

We must understand how interest is calculated without resorting to marketing gimmicks.

We must understand its backend functionality. So that ... Instead of chasing schemes with their headlines, we need to understand their inner depth.

This is one of the languages of marketing to attract people.
Currently, banks are offering a maximum interest rate on both FD and saving accounts.

So... If you want risk-free investments, This will be a good time to do FD for a certain time period of 6, 8, or 9 months or a year.
And.. if you're salaried-employed,

You can consider Recurring deposits and take benefits of these schemes. So... there is no rocket science over here.

And bank hasn't presented any unbelievable schemes to us.
This has already existed. 

It will be easier for you if you understand it like this.
But when will your investment be doubled, tripled, or quadrupled?

-Follow the rules we just learned, such as "Rule of 72" and others.
You can precisely know it in a compounding manner. Besides that, if anybody claims to double your investment,

You can now calculate the interest rate yourself. If your calculation does not match, something is wrong with the schemes.

And you must find the shambles in the scheme on your own.