Mutual fund investment: What is the Rule 72 and Rule 144 in mutual funds? How can it help investors?

Mutual funds are a popular choice among investors due to their versatility and accessibility. They provide a strategic avenue for investors to participate in the stock market, debt market, and the overall economy. One of the key advantages of mutual funds is their ability to deliver risk-adjusted returns, which is vital in today's constantly changing financial environment. 

Investing in equity is a commonly favoured method for long-term wealth growth. Among various equity options, mutual funds stand out as a preferred financial instrument for retail investors due to their inherent diversification across a range of securities and debt instruments based on predefined criteria. 

Mutual funds offer investors a convenient way to combine their financial resources into a diverse investment portfolio. This allows investors to effectively manage the complex relationship between various economic indicators and the performance of the financial markets. When investing in mutual funds, individuals have the opportunity to select from a broad range of asset classes and sub-asset classes, such as equities, bonds, hybrid instruments, and more, in order to align with their specific investment objectives and preferences.

Rule 72 and Rule 144 in mutual funds

While investing in mutual funds, it is a common thing to calculate that in how many years your investments will take to double, triple and quadruple.

"Rule of 72 and 144 is nothing but an easy method of calculating how long it will take for an investment to double and quadruple respectively. This rule is applicable for any financial investment, be it Mutual Fund, Fixed Deposit (cumulative) etc. This rule is mostly used by long term investors, and it gives a firsthand advantage in calculating the corpus quickly with the given return. This method is applicable for products which don’t have any interim cashflows or coupon like Mutual Funds as the compounding comes into picture while calculating the returns over the said period," said Amar Ranu, Head - Investment Products & Insights, Anand Rathi Shares and Stock Brokers.

"The thumb rules of compounding, like the Rule of 72 and the Rule of 144, help in calculating how your money will grow exponentially. To use compounding effectively to your advantage, it’s good to know some of the thumb rules. The crucial factors in these rules are: Rate of Return (R) (in %) and Time (T) (in years)," said Vaibhav Jain, Head of Content and Education, Share.Market.

Rule of 72

The Rule of 72 is a simple formula to estimate how long it will take for an investment to double: 
T = 72 / R

Rule of 144

Similarly, the Rule of 144 helps you determine how long it will take for an investment to quadruple: 
T = 144 / R

These factors are inversely proportional: as the rate of return increases, the time needed to reach your financial goals decreases, and vice versa.
Let’s break this down with an example where we have ₹1,00,000 to invest.

An investment in Fixed Deposit (FD) at an expected 7% Annual Return:
>  will double in approximately 10 years 3 months (72 ÷ 7)
>  will quadruple in approximately 20 years 7 months (144 ÷ 7) 

Similarly, an investment in an Equity Mutual Fund at an expected 12% Annual Return
>    will double in approximately 6 years (72 ÷ 12) 
>    will quadruple in approximately 12 years (144 ÷ 12) 

Understanding these simple yet effective rules can be incredibly handy for financial planning. 

By estimating how long it will take for your investments to grow, you can make more informed decisions about where to allocate your money to meet your future goals.