Find out smart ways of doubling your money

A little bit of mathematics and a little bit of planning can make a world of difference to your life. Let me tell you how!

What you want to achieve

1. You want to create a regular income of Rs 1 lakh per annum so you have liquidity each month.

2. You want to do this by taking minimal risk.

3. You also want to have your capital back whenever you want it.

Assumptions

1. Let’s assume, you’d earn a rate of return of 8 per cent in order to make this Rs 1 lakh per annum.

2. Let us also ignore taxation because that will apply in the regular investing strategy as well as the strategy that I am going to suggest. So the impact of taxation will be the same for both cases.

Strategy one: typical

Divide Rs 1 lakh by 8 per cent and the answer you get is Rs 12.5 lakh. Hence, if you invested 12.5 lakh at 8 per cent per annum, you get Rs 1 lakh per year. Further, when you need the money just redeem your investment and you have your capital back.

Outcome

1. You get Rs 1 lakh per annum

2. Whenever you want your money, you can redeem the capital. The capital is secure because we are assuming a return of 8 per cent which is considered a low risk investment. So if you redeem your money after 20 years, you will get Rs 12.5 lakh back.

Comments:

Most of you would take this strategy and think Rs 12.5 lakh is the answer. You would invest the money, earn an income of Rs 1 lakh per annum on it and it's done forever.

This is the typical strategy. While this is not wrong, there is much more you can do with the Rs 12.5 lakh. This brings us to strategy two.

Strategy two: Alternate

How about getting the same Rs 1 lakh per annum and having your capital double in say 20 years?

So, in 20 years you earn Rs 1 lakh per year, that is Rs 20 lakh. Plus you get back Rs 25 lakh as your capital, instead of Rs 12.5 lakh as per strategy one.

Snapshot comparison between strategy one and strategy two:DEMOGRAPHIC

Note: The figures are approximate.

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How the 'alternate' strategy works

The logic is not to invest the Rs 12.5 lakh directly into the 8 per cent. Here’s how to break up the investment in two parts.

Part one: Invest Rs 10 lakh in an instrument that gives 8 per cent per annum. This would usually be a low risk debt instrument. Let this portion be allocated towards your annual income of Rs 1 lakh.

In the first year, you will get 8 per cent of Rs 10 lakh, that is Rs 80,000 as interest income. However, what you want is Rs 1 lakh. So you withdraw Rs 20,000 from the capital of Rs 10 lakh. Thus, you get an annual cash inflow of Rs 1 lakh.

Thus, your capital amount has reduced from Rs 10 lakh to Rs 9.8 lakh. In the second year, you get an interest of 8 per cent on Rs 9.8 lakh, that is Rs 78,400. In order to make the annual cash inflow of Rs 1 lakh, you will withdraw Rs 21,600 from the capital.

Thus your capital will reduce to Rs 9,58,400. You will continue doing this every year for 20 years. So every year, your interest will reduce and your withdrawal from capital will increase. At the end of 20 years, you would have withdrawn almost all of your capital.

Part two: Invest the balance Rs 2.5 lakh in a mix of debt and equity to generate a return of 12 per cent per annum. Remember, it is quite possible to get this with a 60 to 65 per cent equity allocation and 35 to 40 per cent debt allocation.

Now, do not touch this money for the period of 20 years. Let the returns of 12 per cent per annum keep compounding.

At the end of 20 years, your Rs 2.5 lakh would grow to Rs 25 lakh at 12 per cent annual returns.

Outcome:

1. Out of the first portion of your investment, you will get an annual income of Rs 1 lakh

2. Out of the second portion, you will allow your capital to grow to Rs 25 lakh.

Comments:

With a little bit of planning and some calculated risk, at the end of the same period and with the same initial capital, you can actually get better payoffs.

Tool: Check out the magic of compounding on your invesments

Illustration: Vaibhav Shirke

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