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Rules of investments

Thumb Rule of Investing that every investor should consider before starting their investment journey

In this article, we will discuss the Thumb Rule of Investing. Thumb Rules of Investing     In terms of investing, there are certain thumb rules that help us ascertain how fast our money grows or how fast it loses its value. Then, there are rules to make our investment process easier. Like how should we do our asset allocation, how much to save for retirement & for emergencies etc. Various points to be considered before starting investing are:   1 . The Emergency Fund Rule    As the name suggests, the money kept aside for emergency use is called an emergency fund. It is a good practice to keep at least 6 months to 1 year’s expenses as an emergency fund. While calculating your expenses you should include expenses for food, utility bills, rent, EMIs etc. & instead of keeping it idle in savings bank accounts invest these funds in liquid funds or in FD. These funds provide a little more returns than savings bank accounts. At the same time, like saving banks accounts, liquid funds & FD are highly liquid, i.e. the money is available in very short notice.   2. 100 minus age rule   The 100 minus age rule is a great way to determine one’s asset allocation i.e., how much you should allocate in equities investment & how much in debt investment. For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt. For example, if you are 30 years old and you want to invest Rs 8,000 every month. Here if you use the 100 minus age rule, the percentage of your equity allocation would be 100 – 30 = 70%.  So Rs 5,600 should go to equities and Rs 2,400 in debt. Similarly, if you are 20 years old and want to invest Rs 8,000 every month, then according to the 100 minus age rule the equity allocation would be 100 – 20 = 80%. i.e., Rs 6,400 should go in equities and Rs 1,600 in debt. 3. The 10,5,3 Rule   When you invest or even think of investing money, the first thing that you usually look for is the rate of returns that you will get from your investments. The 10,5,3 rule helps you to determine the average rate of return on your investment. Though there are no guaranteed returns for investments, but as per this rule, one should expect 10% returns from long term equity investment, 5% returns from debt instruments & 3% average rate of return that one usually gets from savings bank accounts.   4. Not considering the impact of inflation on returns   One of the common mistakes that most investors tend to make is to ignore the effect of inflation on returns. We all know that the value of the rupee is not the same as what it was 10 years ago. It’s worth was way more than what it is today. And after a few years, it will decrease even further. It’s almost inevitable. In other words, inflation bites into the value of the rupee and decreases its purchasing power. So, while making any investment, your main aim should be to fetch returns that beat inflation.   5. 10% for Retirement Rule   When you start earning in your early or mid twenties, saving for retirement is the last thing in your mind. But starting to save from your first salary, no matter how little the amount is, you will be able to create a huge corpus for retirement. Ideally it should be 10% of your current salary which you should increase by another 10% every year. For example, If you are 25-year-old & earn Rs 30,000 a month. You have decided to invest 10% of your salary, i.e. Rs 3000, every month & increase it by another 10% every year. The retirement corpus you will be able create by investing in an instrument that provides 10% returns will be approx. to Rs 3.3 crores. A great way to build your retirement corpus is by investing in NPS following the 10% rule. Current Age 25 Investment amount every month Rs 3,000 % of increase in investment amount every month 10% Average rate of return 10% Retirement age 60 Tenure of investment 35 Total retirement corpus Rs 3.3 Crores approx. 6. Rule of 72   We all want our money to double & look for the ways it can be done in the shortest amount of time. Well, calculating the number of years in which your money doubles is very easy with the Rule of 72. Take the number 72 & divide it with the rate of return of the investment product. The number at which you will arrive is the number of years in which your money will double. For example, If you have invested Rs 1 lakh in an investment product that provides you a rate of return of 6%. Now, if you divide the number 72 with 6, you arrive at 12. That means, your Rs 1 lakh will become Rs 2 lakh in 12 years.   7. Rule of 114   Like the ‘rule of 72’ tells you in how many years your money can be doubled, this rule tells you how many years it will take to triple your money. Rule of 114 is similar to Rule of 72. For this, take the number 114 and divide it with the rate of return of the investment product. The remainder is the number of years when your investment will triple. So, if you invest Rs 1 lakh in a product that gives you an interest rate of 6%, then as per the rule of 114, it will become Rs 3 lakh in 19 years.   8. Rule of 144   Two multiplied by 72 is 144. Hence, you can simply understand that ‘rule of 144’ helps you calculate in how many years

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