Having too many options can often create confusion. The same goes for investments. With so many investment options and strategies, it can be difficult to understand which is the right approach for you.
While there are dozens of thumb rules for investing, let us go through the common top 5 thumb rules of investing.
What is a Thumb Rule?
It is an idea or principle that guides you to make a decision. This is based on real-life experiences rather than mere calculations. Here are the top 5 Thumb Rules Of Investing:
Rule of 72:
The rule of 72 states the time taken for an investment to double in value based on its rate of return.
For example, if you invest in an FD offering a 6% rate of interest, then according to the rule of 72, if you divide 72 by the rate of interest, your money will be doubled in 12 years.
72/6 = 12 years
Similarly, if the FD is offering 8% ROI, then your money will be doubled in 9 years and an investment offering a 12% rate of return p.a. will take 6 years to double your money.
You can also reverse this rule to figure out the percentage of returns you need, to double your money. For example, say you want to double your money in 4 years. Divide 72 by 4 which will give you 18% as the answer.
72/4 = 18%
So, you need to find an investment instrument that can give a return of 18% to double your money in 4 years.
You can also use the Rule of 114 in the same manner, to figure out the estimated years it will take to triple the investment.
Also read : 5 Financial Planning Strategies To Save Money
Rule of 70:
Rule 70 talks about the time taken for an investment’s value to become half based on the inflation rate.
This is an excellent rule that helps you to determine what your current wealth will be valued at 10 or 20 years down the line. Even if you do not spend a single penny from it (nor invest it), its worth will be much lesser than what it is today. The reason is inflation.
To calculate this, take the number 70 and divide it by the current inflation rate. The number that you arrive at is the number of years your wealth will be worth half of what it is today.
For example, let’s suppose you have Rs. 1 Crore, and the current inflation rate is 5%. So going by the rule of 70, the value of Rs. 1 Crore will be worth Rs. 50 lakhs in 14 years.
Also read : Safest Investment with high returns in India
100 Minus Age Rule:
The 100 minus age rule is a very simple way to determine one’s asset allocation. That is, how much you should allocate in equities and how much in debt.
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, let’s assume you are 25 years old and you want to invest Rs. 10,000 every month. Here if you use the 100 minus age rule, the percentage of your equity allocation would be 100 – 25 = 75%. Then Rs. 7,500 should go to equities and the remaining Rs. 2,500 in debt.
Similarly, if you are 35 years old and want to invest Rs. 10,000, then according to the 100 minus age rule the equity allocation would be 100 – 35 = 65%. That means, Rs. 6,500 should go in equities and the remaining Rs. 3,500 in debt.
Also read : Benefits of investing in Global Markets
Minimum 10% Investment Rule
When we are at the initial stage of earning, the first thing on our minds may not be saving and investing. However, if you want to benefit from the power of compounding and build wealth to achieve your financial goals, then it is important to save and invest early.
This investment rule says that investors should start by investing at least 10% of their current salary and increase it by 10% every year.
Let’s understand with a simple illustration:
For example, let’s assume that you are 25 years old and earn Rs. 30,000 a month. You have decided to invest 10% of your salary, i.e., Rs. 3000, every month, and increase it by another 10% every year.
Let’s calculate the retirement corpus you will be able to create by investing in an instrument that provides 10% average annual returns.
So, simply by investing Rs. 3,000 every month, and stepping it up by another 10% every year, you would be able to create a corpus of Rs. 3.4 crore by the time you retire at the age of 60.
Also read : 8 Common Investment Mistakes You Must Avoid
The 4% Withdrawal Rule
This is more of a financial discipline rule than an investing rule, but it deserves a mention. Most people try to save for their retirement years and create a corpus that outlasts them.
However, with inflation rates being unpredictable, there is a risk of burning through the retirement corpus before time. The 4% Withdrawal Rule is designed for retirees to ensure a steady income stream without spending their savings at a fast pace.
This withdrawal rule stipulates that you should not withdraw more than 4% of your retirement fund in just one year.
Assume you have accumulated Rs. 2 crores for your retirement life. The 4% requirement is that you need to avoid withdrawing more than Rs. 8 lakhs a year.
Also read : 8 Best Moves For First Time Investor
Conclusion
Thumb rules may provide great assistance, but they should not be the primary reason why you invest or do not invest in any financial product.
It is important to note that these rules are not to be followed blindly, and other factors such as risk appetite, financial goals, and investment horizon should also be taken into consideration before making any investment decision.
And remember, a good investment portfolio is one that works toward your financial goals while keeping your risk tolerance and investment horizon in mind.
Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.
