What is a 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 for investing in mutual funds? Although you can quickly check the returns from a particular fund using an online mutual fund calculator, it is important to note that these rules are equally important for an investor. 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 should we save for retirement and emergencies, etc.?
List of general guidelines to keep in mind while making financial or investing decisions.
RULE OF 72
The rule of 72 dictates how long it will take to double your investment.
Dividing 72 by the expected rate of return would give a fairly accurate estimate of how long it will take your invested money to double. Let’s look at an example to grasp this rule better. Assume you’ve put Rs 1 lakh into a product with a 6% return. When 72 is divided by 6, the result is 12.
That means your Rs 1 lakh will have increased to Rs 2 lakh in 12 years.
Keep in mind that this rule only applies to mutual fund investments that pay compounded returns.
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THE RULE OF 114
While the ‘rule of 72’ tells you how long it takes to double your money, this rule tells you how long it takes to triple your money.
The investing principles of 114 allow you to get a relatively precise estimate of the number of years your investment can take to triple using the same reasoning and mathematical method.
Rule of 114 states that if you invest one lakh at 6% per year, it will rise to three lakh in 19 years.
THE RULE OF 144
The next thumb rule to remember while investing in mutual funds is rule 144: 72 multiplied by 2 equals 144. As a result, the ‘rule of 144’ can be easily comprehended as a method for determining how many years your money will double if you know the rate of return on investment.
For instance, if you invest Rs 1 lakh in a product with a 6% interest rate, it will rise to Rs 4 lakh in 24 years, according to Rule 144. To calculate the number of years, it will take for the money to grow fourfold, divide 144 by the product’s interest rate.
100 MINUS AGE RULE
The 100-minus-age rule is an excellent method for distributing one’s assets. That is, how much of your money should be invested in equity and how much should be invested in debt?
This investment guideline requires you to subtract your age from 100. The end result is the appropriate proportion of equity exposure for you. The remaining cash might be used to make investments in debt mutual funds and gold ETFs.
INVESTMENT RULE OF 10% MINIMUM
According to this rule of thumb, investors should start by investing at least 10% of their present salary and increase it by 10% each year as their salary package increases in value. If you start investing early, you can take advantage of the power of compounding. Begin early to reap the advantages of future investment. Online shopping and frivolous spending can wait.
EMERGENCY FUND serves – 12-24 months
You must contribute a portion of your salary to the emergency fund, similar to the minimum 10% investment guidelines. You should be financially prepared since you never know when life will throw you a curveball. This rule states that you should set aside 12 months’ worth of monthly expenses.
WITHDRAWAL RULE OF 4%
Stick to the 4% withdrawal guideline if you want your retirement money to outlive you. If you follow this advice as a retiree, you will have a consistent income. However, you have a substantial bank balance to earn adequate profits.
For example, if you have a retirement corpus of one crore, the 4% withdrawal rule dictates that you take Rs. 4 lakhs per year or Rs. 33,000 per month to keep up with inflation.
Summing Up
The aforementioned mutual fund investing thumb rules are broad guidelines and principles that every investor should follow. A smart investor is cautious, and you should conduct your research and talk with an investment specialist before getting started.
Mutual fund investments are subject to market risk, please read the scheme-related documents carefully.
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