Till today one of the most common methods of investment for our surplus funds is in Bank’s FD. Sometimes it must have occurred to you, whether the maturity amount mentioned on the FD issued by the bank is correct or not. Or you may be anxious to know about the maturity amount of a FD, to be made by you. The Calculation of the maturity amount of FD can be done very easily on your mobile or laptop as under:-
We can understand this by an example. Let’s presume that the current rate of interest is 8%, the amount of investment is Rs 10,000.00 and the period of investment is I year.
- Divide the rate of interest (presumed above) being 8% by 42 (divided by 4 because the interest is compounded at quarterly intervals in Banks and there are 4 quarters in a year)
- Add 100 into 2-102
- Divide 102 by 100-1.02
- Multiply 1.02 x 1.02 x 1.02 x 1.02 = 1.08243216
- This is the maturity value for Rs. 1.00. Since our amount of investment is Rs.10000.00 multiply 1.08243216 with 10000. The maturity value will be Rs 10824.32 (figures after decimal rounded off up to 2 digits.) If the period of investment is 2 years the factor 1.02 will be multiplied 8 times (because there will be 8 quarters in 2 years and so on)
Golden Rule 72
In personal finance, if you divide the number 72 by rate of interest you get to know the number of years it will take for you to double your money. E.g. If the rate of interest is 9%, simply divide the number 72 by 9% and the answer is 8. Thus it will take 8 years to double your money, if you invest at 9% rate of interest.
Interest: We can use this rule in reverse to know the rate of interest needed to double your money to achieve your set goal. E.g. you have Rs. 5.00 laks today and want Rs.10.00 laks in 5 years. Just divide the number 72 by 5 the answer is 14.41%. Thus you need a type of an avenue, where you earn at least 14.41 % as rate of interest, to double your amount in 5 years.
Inflation: The “Rule 72” helps you to understand inflation also. It helps you to calculate the amount of time it will take for inflation to make the real value of money half. Let’s say the present rate of inflation is 5.5%. When you divide 72 by 5.5% the answer is 13.09. That is to say if you have one lakh in your account today, it will take around 13.09 years for the value of money to be halved. Therefore, in order to increase the purchase value of your money, please invest your funds in those financial products, where the return on investment is greater than the current rate of inflation.
I hope these small tips will help you in your day to day investment decisions.
Happy Investing
Sh. S.P. Sharma
Chief Manager (Retd.) State Bank of India