Yes, What you have read is correct. I have discovered a nuclear missile in investment. once you launch this missile in your life, you will become rich.
We all thought about this nuclear missile in investment in our school days. Some people using its power and potential by knowingly, but most people using this nuclear missile in investment in their life unknowingly for creating wealth.
Before I am revealing to you about the nuclear missile in investment and why I am saying that as a nuclear missile in investment. I want to give you a quick overview of the nuclear missile.
- 1 Working of Nuclear Missile
- 2 The nuclear missile in investment
- 3 What is compounding investment returns?
- 4 The Rule of 72
- 5 Time and the value of money
- 6 Compounding of money and compound interest formula
- 7 Alternative ways of investment
- 8 Conclusion
Working of Nuclear Missile
The nuclear missile is a missile which uses nuclear reaction for destruction.usually this kind of nuclear reaction can accomplish by two ways
1. Nuclear Fission and 2. Nuclear Fusion
In modern days, Nuclear missile(s) works either by nuclear fission or by combining both nuclear fission and nuclear fusion.
You should know prior
All matter composed of atoms (a small structure that houses the different combinations of protons, neutrons, and electrons).
Each atom has protons and neutron in their center(nucleus or nuclei). Most nuclei are relatively stable.
Nuclear fission is the process of splitting heavy nuclei into two or more small nuclei and releasing excess energy when it is bombarding with a neutron. In some isotopes like uranium and plutonium, fission process releases excess neutrons which lead to a chain reaction if they are absorbed by nearby atoms.
Nuclear fusion is the process of adding two lighter nuclei to form heavier nuclei by exposing it to high temperature and pressure. This process also releases energy.
The nuclear missile in investment
Like the nuclear fission and fusion in the nuclear weapon. In the world of investment, compounding will make your investment burst.
I will explain to you the power of compounding and how important it is to know as an investor or businessmen.
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
What is compounding investment returns?
In simple terms, compounding refers to the growth in investment amount by adding earned interest back to the investment amount again or compounding investment means that you will get interest income from your previous interest income.
Like the nuclear fission, compounding will multiple your money exponential and in each compounding period it fuses (like nuclear fusion) your money together and makes your money works for you.
In the long term process of wealth creation, compounding plays a major role.
You can use compounding calculator to get a good understanding about compounding.
In our day to day life, you can be able to see, how people are using compounding for creating wealth. Here I shared some
- savings bank account
- recurring deposits
- PPF(tax-free interest)
- sukanya samriddhi yojana etc
Even in business, businessmen creating wealth using compounding by reinvesting their earned profit back to business again.
For instance, let us assume that Sam is investing $10,000 in debt linked mutual funds which assures to give him 8% returns. At the end of the first year, he gets $800 as interest.From 2nd year, $10,800 ($10,000 + $800 (interest from 1st year)) will starts to work for him.
” Compounding: Principal amount and Interest earned will start to work for you “
Ask Warren Buffett for the single most powerful factor behind his investing success, and he’d respond “compound interest” — without skipping a beat.
The growth of money depends on three factors,
- The rate of Interest
- Holding period and
- Penalty rates(tax and exit loads)
If you are investing your money in investment materials which provide the higher rate of interest, low penalty rates and high holding period, then you will get high returns.
If you are investing your money in investment materials which provide the lower rate of interest, high penalty rates and low holding period, then you will get low returns(low appreciation).
“The speed of compounding of investment returns become faster in later years”.
For instance, let us assume that Sam is investing $10,000 in debt linked mutual funds which assures to give him 8% returns. Now look at the below table how his investment grows
You can be able to see here that it takes around 9 years to double sam’s investment money of $10,000.This is called the rule of 72.
The Rule of 72
It helps us to determine the number of years it takes to double your money at a given rate of interest.
“Money doubles if the product of the rate of interest and the time horizon is equals to 72.”
Let’s understand with an example.
It will take 9 years to double your investment if the rate of return is 8%. 9 X 8 = 72
|The rate of Return||Exact years||Years (Estimation by the rule of 72)|
Time and the value of money
Time is the most precious thing in this universe. you can find its importance when you are in the exam hall and your exam invigilator says last few mins or when your manager asks you to prepare for a demo of your work or when you are talking about your missed situations like I have the idea of buying bitcoin in 2011 when its price was just 11$ so on.
Don’t spend your time on unnecessary things, live the best of your life by managing your time wisely.
“Time is more value than money. You can get more money, but you cannot get more time.” – jim rohn.
In the same way, the time has its importance in investment. Your investment will grow based on how long you are holding your investment.
For this reason, when you enquire or read about investment, their advice would start as early as possible.yes its true, I too advise you to start your investment plan even after reading this post.
Let us assume that you invested 1 lakh with yielding 18%(rate of interest) after reading this post, your investment would become 62 lakhs in 25 years.
Investment is not an option,it is necessity
Money value becomes weaker while time passes.
It says that the value of money becomes weaker due to inflation which the price of goods and services increase.
I want to share with you an incident, that when I started my carrier as a fresher, my manager who is a supporting guy of the organization who used to say that “Man, you are earning well, I took 4 years to get this paycheck”.During that time I am not bold enough to say to him that “when you are entering as a fresher cost of goods and services is low compared to now. Its called inflation”. Hoping that he would see this.
Next time if someone saying that you are earning better than me when I was at your age. Explain to them about the inflation and you should also fit yourself to the industrial standard around you while saying your expectation.
so as an investor you should also consider inflation.
“The investment grows your money, inflation shrinks your money. “
Choose your investment product wisely that beats the inflation. Otherwise, it is not called an investment.
I want to give a brief tabular column with respect to time horizon and rate of interest. Let us assume that you are investing 1 lakh(1,00,000) in 2018
|2028 (10 years)||2038 (20 years)||2048 (30 years)||2058 (40 years)|
|12%||3 lakhs||10 lakhs||30 lakhs||93 lakhs|
|15%||4 lakhs||16 lakhs||66 lakhs||2.67 cr|
|18%||5 lakhs||27 lakhs||1.47 cr||7.50 cr|
|20%||6 lakhs||38 lakhs||2.37 cr||14.69 cr|
Above table will give you idea about how time and rate of interest will make the concept of compounding powerful.
Compounding of money and compound interest formula
Most of us learned about compound interest formula in our school days.
We are going to use the same here to find the future value and present value of our investment.
This formula can be used to find the present and future value of our money.
For example, let us assume you invested $1000 @12%(interest rate) for 5 years, then
To understand more let we take some real-life situation and solve
Example 1 : LIC Money back policy 20 years plan
I have taken LIC Money back policy 20 years plan, before discussing this plan I will give you an overview of this plan
Terms: 20 years
Sum Assured: 100000(min) – no limit
Survival benefit: 20% of sum assured in 5th,10th and 15th year
Maturity amount: 40% of sum assured + Bonus(variable)
Need to pay premium till 15 years
Let us assume that you opt for LIC Money back plan – 20 years for a sum assured of Rs. 3,00,000 at your age 25.
Used LIC ALL IN one app for premium calculation:
1st year Premium With TAX 4.5% :
Yearly : 23821 (22795 + 1026)
After 1st year Premium With TAX 2.25% :
Yearly : 23308 (22795 + 513)
|Year||Age||Details||Money Backs and Maturity|
|2023||30||First Money Back (After 5 Years)||60000|
|2028||35||Second Money Back (After 10 Years)||60000|
|2033||40||Third Money Back (After 15 Years)||60000|
|2038||45||Maturity (approx) (After 20 Years)||359000|
Maturity amount: 40% of sum assured + Bonus(variable)
40% of 3,00,000 = 1,20,000
For this plan, there are two Bonus
1.Simple Reversionary Bonus
2.Final Addition Bonus
Simple Reversionary Bonus
It is declared per thousand sums assured at the end of each year.
For eg this year it 39/1000 (for every 1000 rs they will give you 39 rs ) for this year.
so simple reversionary bonus for this year would be
SRB(2018) = Sum Assured * (39/1000)
= 300000 * (39/1000) = 11700
For every year LIC will declare SRB(simple reversionary bonus) for all schemes.
Since for the past decade, it is 39 rs per 1000 rs for this scheme. By considering this I took 39/1000 as SRB for all 20 years of my calculation.
Maturity = 300000 * (39/1000) * 20 = 234000.
Final Addition Bonus
The final additional bonus is a one-time payment paid along with final payment of the policy means maturity or as a result of death.
Minimum term required for the eligibility of Final Additional Bonus is 15 years.
As per my research, it would be between 2500 to 5000 (25rs per 1000 or 50 per 1000).
I took the maximum value of 5000 for the final additional bonus.
Maturity amount = 40% of sum assured + SRB + FAB
= 1,20,000 + 2,34,000 + 5000
Let’s see what happens if you have invested the same amount in some other investments which promise to give you 8% returns. Then you would get
15 years of compounding with yearly investment (RS 22795/-) – 6,68,447
Interest from previous maturity amount for 5 years – 3,13,721
FINAL Amount – Rs. 9,82,168
From the above examples, I think you got a clear picture of how compounding will help you in creating wealth.
Breaking the power of compounding in the 5th,10th and 15th year.
Alternative ways of investment
#1 Equity Large-Cap Mutual Funds
Average 5 years returns of Large cap mutual funds is 20.33%.
As per rule of 72, your investment would get doubled every 3 years 7 months.
If you have invested Rs.1000, it would become 6,364 Rs after 10 years.
#2 Equity Mid-Cap Mutual Funds
Average 5 years returns of Mid-cap mutual funds is 27.8%.
As per rule of 72, your investment would get doubled every 2 years 7 months.
If you have invested Rs.1000, it would become 11,622 Rs after 10 years.
#3 Equity Multi-Cap Mutual Funds
Average 5years returns of Multi-cap mutual funds is 22.1%.
As per rule of 72, your investment would get doubled every 3 years 3 months.
If you have invested Rs.1000, it would become 7,547 Rs after 10 years.
Be an early bird in investment. Because it will give you enough time for your investment to grow and choose the financial product with the high rate of interest and low penalty.
The journey of a thousand miles begins with one step.