7 Universal Thumb Rule For Investing02 February 2022
What is the thumb rule? A Thumb rule provides guidelines and assistance on doing or approaching a specific task. It offers a simplified set of rules or a course of action. From sports to cooking, thumb rules apply to everything. So, why should investing be an exception?
So, What Is the thumb rule to invest in mutual funds? First, a few investing rules might enable us to assess how quickly our money grows or loses value when investing. Then some rules guide us through our investment process. For example, how should we allocate our mutual fund assets, how much we should save for retirement and emergencies, etc.
We've compiled a list of general guidelines to keep in mind while making financial or investing decisions.
7 Thumb Rules For Investing
The first three thumb rules are essential to understand how to quickly appreciate the value of money.
Rule of 72
We all want our money to double in value and are looking for strategies to achieve so in the quickest period possible. The rule of 72 determines the number of years it will take to double your investment.
If you divide 72 by the predicted rate of return, you may get a very accurate estimate of how long it will take your money to double using this approach. Let us understand this rule with the help of an example. Let's say you've invested Rs 1 lakh in a product with a 6 % return. When you divide 72 by 6, you get 12 as a result.
That implies in 12 years; your Rs 1 lakh will have grown to Rs 2 lakh.
It's vital to remember that this rule only applies to assets that pay compound interest.
You may also use the Rule of 72 to figure out how much interest you'll need to double your money in a certain amount of time. For example, if you want your investment to double in 5 years, to find out the interest rate, you have to divide 72 by doubling time to give you the interest rate. I.e., 72/5= 14.4%p.a. Therefore, to receive double the amount, you should receive 14.4% p.a
Rule Of 114
The 'rule of 72' informs you how long it will take to double your money, while this rule tells you how long it will take to triple your money.
Using the same logic and mathematical formula, the investing rules of 114 allow you to get a relatively accurate estimate of the number of years your investment can take to triple.
According to rule 114, if you invest 1 lakh with 6%p.a, it will grow to 3 lakhs in 19 years.
Similarly. If you want your investment to grow in 5 years. So, divide 114 by 5, which will give the interest rate of 22.8% p.a. To triple your money in 5 years.
Rule of 144
The next thumb rule when investing in the mutual fund is rule 144. 72 multiplied by 2 is 144. As a result, the 'rule of 144' may easily be understood as a tool for calculating how many years your money will increase four times if you know the rate of return.
For example, according to Rule 144, if you invest Rs 1 lakh in a product with a 6% interest rate, it will grow to Rs 4 lakh in 24 years. So to figure the number of years it will take for the money to increase four times, just divide 144 by the product's interest rate.
100 Minus Age Rule
The 100-minus-age rule is a fantastic technique to figure out allocating one's assets. That is, how much of your money should go into equity funds and how much should go into debt.
According to this investment rule, you must deduct your age from 100. The result is the proportion of equity exposure that is suitable for you. The remaining funds can be used to invest in debt.
Suppose you are 25 years old and wish to invest Rs 10,000 every month, for example. The proportion of your equity allocation will be 100 – 25 = 75 percent if you follow the 100 minus age rules of investing. Then you should invest Rs 7,500 in shares and Rs 2,500 in debt. Similarly, if you are 35 years old and wish to invest Rs 10,000, your equity allocation would be 100 – 35 = 65 percent based on the same rule. That implies you should invest Rs 6,500 in shares and Rs 3,500 in debt.
Minimum 10% Investment Rule
According to this thumb rule, investors should begin by investing at least 10% of their current salary and raise it by 10% each year, as the salary package appreciates. It is best to take advantage of the power of compounding if you start investing early. Start young to reap the benefits of investing in the future. Online shopping and unnecessary expenses can wait.
Emergency Fund Rule
Similar to the minimum 10% investment rules, you must contribute a portion of your salary towards the emergency fund. You must be financially prepared because you never know when life throws a curveball at you. Therefore, it is advised to set aside emergency funds before you begin investing. According to this guideline, you must set aside cash equal to at least 3-6 months' worth of monthly spending.
During a crisis, an emergency fund must be accessible, and it is best to keep it liquid to avoid any financial crunch.
4% Withdrawal Rule
If you want your retirement fund to outlast you, stick to the 4% withdrawal thumb rule. If, as a retiree, you follow this guideline, you will have a regular income. But, at the same time, you have a sufficient bank balance to generate adequate profits.
For example, You have a retirement corpus of 1 crore, so according to the 4% withdrawal rule, you should take Rs. 4 lakh every year or Rs. 33,000 every month to survive through inflation.
The above-mentioned thumb rules for investing are general guidelines and principles that every investor should follow. Caution is the hallmark of a good investor, and you should do your homework and consult with an investment professional before getting started. That is why it is critical to emphasize that these guidelines should not be blindly followed. Note that a solid investment portfolio helps you achieve your financial goals while also considering your risk tolerance and time horizon.
Frequently Asked Questions
What is the 5 percent rule in investing?
The five percent rule is an investment concept that states that investors should not put more than 5% of their portfolio money into a single fund.
What percentage should you invest in mutual funds?
The ideal amount that a salaried person should typically invest in mutual funds depends on several components namely expenditure and long term goals. The least you can implement is a 50:30:20 rule in your financial plan. The rule is extremely straightforward. It encourages you to divide your income in three parts:
- 50%- For your needs
- 30%- For your wants
- 20% -For saving and investing.
Therefore, one should invest a minimum of 20% of the salary in mutual funds investments through SIPs to build a sizeable corpus. And subsequently increase the percentage of SIP each year to add towards new goals and to beat inflation.
What are the three golden rules for investors?
The following are the most important golden rules for investors:
- To start early.
- To be consistent
- Take advice from your financial advisor.
Disclaimer: All Mutual Funds are subject to market risk. Please read all scheme-related documents carefully.