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Fixed Deposit (FD), Know your rules

and , February 5, 2021, 0 Comments

I was a teenager, way back in the early nineties, when my elder sister, a science student, was appearing for her medical entrance exams. Coming from a humble background, with both parents in government service, there was always a lot of emphasis on studies and on making a career for ourselves. My parents were very particular about our education (no disparity between daughters and son was ever experienced by us). As a result, a lot of family income and family savings were directed towards funding our higher education. Medical education, even if from a government-run institution, would not have come cheap.fixed-deposit-fd-rules--marketexpress-in

I heard my parents discussing the finances one day, when my mother, with great relief and pride, told my father about an FD (fixed deposit) that she had taken with her bank five years ago. It was nearing maturity and the money would be doubled. She was happy with her decision of taking an FD and waiting for 5 years for the money to double- something that would come in handy in financing my sister’s medical education.

However, jump to the year 2021, if I follow my mother’s footsteps and take an FD with my bank, will my money double in five years? Discussing the issue with my financial advisor, he explained THE RULE OF 72. He apprised me that the Rule of 72 is a very popular rule that helps an investor, determining how long it will take for his/her investment to double. The rule states that dividing 72 by interest rate (i.e., 72/r) will tell the number of years in which the money gets doubled. So, if banks offer interest on investment (FDR) of 10%, the time taken for the money to double will be 7.2 years; Similarly, for a 9% interest rate, the period will increase to 8 years and if the rate of interest falls to something as low as 4%, the period will rise to 18 years before the invested money will double itself. Likewise, applying simple arithmetic, I can quickly understand that it is easy to find the earned interest rate if I divide 72 by the number of years (n) in the same manner.

I was overwhelmed to learn this thumb rule of investing. I could now discern the importance of investment. He then explained to me  THE RULE OF 110, provided the investment is for a long period. Dividing 110 by interest rate gives me the number of years my investment can get trebled.  Likewise, I was also told of THE RULE OF 144. This rule points to the number of years in which my investment is multiplied by four times, by dividing 144 by interest rate where the investment made is even for a longer period.

In the recent past, bank interest rates have fallen drastically. This can be attributed to the various monetary policy changes initiated by the government from time to time. The matter gets worse given a very little understanding of the Equity market. Given that the rate of interest offered on FDR is quite low, and the equity market being a risky investment for a novice person like me, I asked him, is it even worthwhile to invest money for longer durations now? These questions once again take me in the past and the conversations that I had with my grandfather about the rising prices. He used to tell us how he could live comfortably with his meagre salary, back in the fifties and sixties. He could feed the family well, educate all his children and to top it, construct a house too, and all this with a salary of only a few hundred rupees per month.

The discussion led him to explain THE RULE OF 70.  This rule explains how inflation erodes our purchasing power. If the interest rate ( r) is now replaced with the rate of inflation (i), it reveals the number of years in which our money value gets halved, provided we do not invest at all. The discussion opened my eyes, prompted me to invest in appropriate instruments so that I can apply the rules of 72, 110, and 144 in the future and avoid the situation of the rule of 70  of my money.