A Beginner Guide to Investment by Tuhin Chakraborty

-Tuhin Chakraborty 

• The rule of 72

It tells, the number of years it will take to double your money is given by dividing your expected rate of return by 72. For example at 10% return, your money will double in 72/10 = 7.2 years.

• Rule of 70

This rule gives us an idea about how inflation is eating away our money. Dividing 70 by the average rate of inflation gives the time during which the value of your money will be half after considering inflation. For example, at 5% average inflation rate your money shrinks to half from its initial value in inflation adjusted terms in 70/5 = 14 years.

• Asset Allocation

The best rule of thumb for asset allocation, considering the effect of your age is. 100 - your age rule. This tells us the aforesaid quantity in percentage terms you should invest in equity securities. Rest in debt securities. If your age is 40, then you should invest 100-40 = 60% of your portfolio in equity securities and the rest in debt securities.

• Reasonable Expectations 

For most individual retail investors, expecting stupendous returns in a short period leads to disappointment. Thus, leading to investing blunders.

Here comes the 12-6-3 rule.

Your expectations should be 12% per year from equities, 6% from debts and 3% from savings accounts.

• Spending on your daily needs

Here comes the 40-40-20 rule. One should spend 40% of his income on his family's daily needs, 40% on investment and savings purposes and 20% on vacations, eating out and other spending on a monthly basis.

• Maintaining an emergency fund

One should definitely maintain an emergency fund of at least 12 times his monthly income. In this way, he can have a cushion of safety in an unpredictable future. Covid pandemic made us realize the importance of maintaining an emergency fund in the hardest possible way.

• Loans & EMI

Managing credit is impossible. The interesting part about loans is that they give you leverage in good times. But when bad times knock on your door, they are also the one who gives you the most pain. So first, be careful about being lured to use credit frequently. Go for loans only when it's necessary. And never have more than 40% of your monthly income as EMI payments.

• Insurance coverage

First, don't buy unnecessary insurances anticipating the future. Never be a pessimist while buying insurance, rather be a realist. The ideal coverage for life insurance should be 10×annual income.

And at last, remember they are not holy rules. You can always alter some of the rules and emotional frameworks in accordance with your need.

 

Be prudent with your hard earned money.