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The 2X Game

How quickly money doubles in any risk (growth) investment?

That, I think is the best measure of categorizing returns into buckets of “Satisfactory”, “Good” and “Excellent”. And for good measure, let us also throw in the “Extraordinary” return bucket.

Though we need to establish a reference point first. Like it or not, comparison or relativity needs to be there.

Let’s say you get 5% post tax returns from fixed rate (risk free?) investments. It takes slightly more than 14 years to double the money at this rate of return. Here is my categorization of returns from risk investments:

-          Satisfactory: Money doubles in two thirds the time of fixed rate of return. A return of 7.59% does this trick. Quiet a lowly return one would say. Do realize that it takes nearly 5 years lesser to double the money than fixed rate ROI

 

-          Good: Money doubles in half the time of fixed rate of return. ROI in this case would be 10.25%. Money doubles nearly 7 years earlier than risk free rate of return

 

-          Excellent: Money doubles in one third the time of fixed rate of return. The return figure now is 15.76% and most of the investors will be happy to get this rate of return. Money doubles nearly 9.5 years earlier than risk free rate of return

 

-          Now comes the “Extraordinary” return category: My definition of this is - money doubles in half the time of “Good” category rate of return. Essentially, we seek double the “good” times category return. In this situation, money doubles in 3.55 years. That is nearly 11 years lesser than risk free rate of return

 

Most of the people will only consider “Excellent” if not “Extraordinary” ROI as the objective of investing in risk assets such as equity mutual funds. “Satisfactory” or “Good” category is abhorring. Here is something to ponder upon – let us assume your investing horizon is 25 years*** and you invest INR 25 Lacs on lump sum basis. Here is what you get after 25 years:

-          With 5% - the base ROI, your closing corpus is nearly INR 85 Lacs. Mostly, inflation (mehngai in hindi) would have easily gone up by this rate and in purchasing power terms, investor return will be nil in best case and negative if one’s personal inflation rate is higher than 5%

 

-          With 7.59% ROI, which most would say is poor return from growth or risk assets, your closing corpus is nearly INR 156 Lacs. This is INR 71 Lacs extra than base 5% return corpus. Even if one considers inflation rates as 6%, one still gets nearly 1.6% real return and enhances one’s purchasing power

 

-          With 10.25% ROI, which most of investors would not call “Good”, you end up with nearly INR 287 Lacs. This is around INR 202 Lacs over base 5% return corpus. This rate of return should quite easily manage the inflation game

We will not do the workings for “Excellent” and “Extraordinary” categories. Those are anyways awesome and will beat inflation hands down.

However, as we have seen vide the 2X game we played, even not so “good” returns of 7.59% and 10.25% double your money in significantly lower periods than risk free rate of returns and give your investment end period corpus significant boost.

Before I forget, the rate of returns mentioned are post tax. If we consider long term capital gains tax rate as 12.5% plus cess in risk assets such as equity mutual funds, the pre tax ROI figures are:

-          7.59% post tax translates to 8.72% pre tax, and

 

-          10.25% post tax goes up to 11.78% in pre tax terms.

 

Now, I guess rates look tad better and most would take these ROIs a bit more seriously. As for my capital, I will hope for the “Excellent” but will be very happy to get “Good” rate of return.

 Have a nice weekend!!!

***Start investing at age of 35 years and stop by 60 years. 

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