5 Investment Related Thumb-Rules Every Investor Should Use

Investing thumb rules are simple, easy-to-follow principles that provide a framework for making informed decisions in dynamic market conditions. They help in simplifying complex concepts and offer a reliable way to stay on track to achieve your financial goals. These rules can help in navigating investments, managing risk, and optimising returns.

Using thumb rules can also help enhance your financial strategy and guide you towards lasting wealth. While thumb rules can give you estimates, they are not as accurate as seeking professional help when it comes to investment planning. However, not all investors can afford professional help when it comes to investment planning. Using thumb-rules to start your investment journey can be helpful if you cannot afford a professional investment advisor. Here are some thumb rules which investors can consider:

Rule of 72

The Rule of 72 is a simple method for calculating the number of years in which the amount you have invested can double. To use the thumb rule you can divide the number ‘72’ by the rate of return of an asset. The number you get as a result of the division is the number of years in which you can double the money you have invested. For example, if you invested Rs 1 lakh in a product with a 6 per cent return, dividing 72 by 6 results in 12, indicating that your Rs 1 lakh will double and grow to Rs 2 lakh in 12 years.

Rule of 144

The Rule of 144 helps in calculating in how many years you can get four-fold returns on your investment. Similar to the Rule of 72, investors need to divide the rate of annual return by 144 to get the number of years in which they will get four-fold returns. For example, if you invest Rs 1 lakh in a product with a 6 per cent interest rate, it will grow Rs 4 lakh in 24 years. To calculate this, divide 144 with the asset’s interest rate.

Inflation Thumb Rule

The rule of 70 suggests that your current wealth will be worth less in the future due to inflation. To calculate this, you can divide 70 by the current inflation rate. For instance, if you have Rs 50 lakh and the current rate of inflation is 5 per cent, your wealth will be worth Rs 25 lakh in 14 years. This calculation is based on the fact that your money will be worth less than what it is today. This rule can be applied in combination with other investment rules to understand the rapid fluctuations in your money's value.

10,5,3 Strategy

The 10,5,3 rule is a strategy which estimates the average rate of return on investments. It suggests that 10 per cent returns are expected from long-term equity investments, 5 per cent from debt instruments, and 3 per cent from savings bank accounts. While mutual funds do not offer guaranteed returns, this rule provides a guideline for determining the average return on some investments.

100 Minus Age

The 100 minus age rule is a useful tool for determining asset allocation, determining the percentage of equity and debt investments. It subtracts an individual's age from 100, resulting in a percentage of 75 per cent for equity and 2,500 for debt. For example, if a 25-year-old wants to invest Rs 10,000 monthly, the percentage would be 75 per cent, with Rs 7,500 going to equities and Rs 2,500 in debt. For a 35-year-old, the equity allocation would be 65 per cent, with Rs 6,500 in equities and Rs 3,500 in debt. This method helps in determining the most suitable investment strategy for you.