The money in not grown merely by saving. Investing the money is the key to create wealth in the long run. There are several ways of investing your money, but if you follow some thumb rules, it may help you not only avoiding risks but also to make decent returns in the long run. In this blog post, we will know about seven thumb rules of investment which can be considered as guiding rules for making decisions in your investment journey.
Rule No. 1: 100 Minus Age Rule
If you are confused how to allocate your assets between equity and debt, then this rule will help you. According to this rule if you want to decide, how much percentage of your assets should be invested in equity then subtract your age from 100. The answer will be the percentage of your total assets which you should invest in equity.
For example, if your age is 54 years, then percentage of your assets to be invested in equity should be = 100- 54 = 46%.
It means that you should have equity exposure of 46% of your total assets and the rest of 54% should be invested in debt funds.
There is one advice that you should do your own research and should not blindly follow this rule. If you have more risk carrying capacity, then you can invest more in equity funds.
Rule No. 2: Minimum 10% Investment Rule
This rule says that you should start by investing at least 10% of your income and increase it at least 10% every year. Investing from early age is crucial for wealth creation because then you may get benefitted from power of compounding.
Rule No. 3: Rule of 72
This rule gives you an idea about the time period within which your investment will be doubled.
To use this rule, divide 72 by the rate of return of your investment. The answer will be the number of years by which your investment will be doubled.
For example, let us say rate of return on your investment is 8.5%. Now divide 72 by 8.5, the answer is (72/8.5=) 8.47. Therefore, you can arrive on the conclusion that in this case your investment will become double within approximately eight and half years.
You can also use this rule to calculate the rate of return required to double your investment within a fixed time period.
Suppose you want your investment to be doubled within 7 years. Then the rate of return required to double the money within 7 years will be arrived by dividing 72 by the number of years, i.e., 7 years in this case, which comes out to be (72/7=) 10.28. So your money will be doubled within 7 years if you get the rate of return of 10.28%.
Please note that this rule is applicable for investments, which offer compound rate of interest.
Rule No. 4: Rule of 114
Similar to rule of 72, if you want to know the number of years by which your investment will be tripled, then you can apply this rule. Simply divided the number 114 by the rate of return and you will get the answer.
For example, if you invest Rs. 2,00,000/- with an expected rate of return of 9%.
Divide 114 by 9, i.e., 114/9= 12.67
It means that your money will become three times, i.e.. Rs. 6,00,000/- if you keep it invested for approximately 12.67 years with 9% rate of return.
If you want your investment to be tripled within 9 years, then the required rate of interest would be obtained by dividing 114 by 9.
Hence required rate of return to make your investment three times within 9 years is (114/9=) 12.67%.
Again, note that this rule is applicable for the investments offering compound rate of interest.
Rule No. 5: Rule of 144
Similar to the rule of 72 and rule of 114, if you want to know the time period by which your investment will be quadruple at a given rate of return, you will have to divide 144 by the rate of return and you will get the answer.
For example, if the rate of interest is 7%, then your investment will be four times by (144/7=) 20.57 (approximately twenty and half years).
If you want your investment to be four times within 12 years, then the rate of interest required will be obtained by dividing 144 by 12, i.e., (144/12=) 12%.
Like the rule of 72, and the rule of 114, this rule is also applicable for the investments offering compound rate of interest.
Thumb Rule 6: Emergency Fund Rule
This is very important rule which helps to save your long term investments. According to this rule, you should set aside at least three months of your monthly income as emergency fund for meeting unforeseen expenditures. This fund should be kept liquid so that you can utilize it in emergency situations. If you do not have provision for emergency fund, then you will have to break your long term investments, which otherwise would have fetch you good returns. So it is very necessary to keep provision for emergency fund to safeguard your long term investments.
Thumb Rule 7: 4% Withdrawal Rule
This rule is for retired persons who has kept retirement corpus for their living expenses after retirement. This rule states that, if you withdraw 4% of your retirement corpus every year, you will be able to manage your living costs. It means that, suppose you have a retirement corpus of Rs. 1.5 Crores, then you should not withdraw more than 4% of your retirement corpus, i.e. Rs. 6 lacs per year, to manage your living costs. The reason being, if you will withdraw more than 4% every year then your savings will be depleted early and your fund will not be maintained. So, to maintain your retirement corpus and still manage your living costs, you should follow this rule.
Conclusion
The investment formulas described above may be used by any investor, however it should he kept in mind that, these formulas should not be followed blindly. You should also make your own calculations and analysis before using these rules. Investing is crucial to grow your money in the long run, therefore, following some basic rules of investing is very helpful in protecting and growing your funds.
Also read: Indirect investment in Real Estate with small amount of money!
