The Thumb rule

There are certain thumb rules in the world of investing. It gives a rough idea to an investor to ascertain the value of money after certain duration, proportion of investment in debt/ equity and many other things.

To become a Crorepati(millionaire) through mutual fund investment an investor needs to follow the well-known rule of investment i.e., the rule of   15 * 15 * 15. This rule can make an investor Crorepati by investing continuously for 15 years, a sum of Rs 15000 per month through SIP in an equity mutual fund having prospects to earn a return on investment @ 15%.

Investment amount15000
Investment ModeSIP
Investment Period180 months (15 years)
Amount invested27 lakh
Expected rate of return0.15
Corpus generated after 15 years1,01,52,946

See the above table. This clearly reflects the worthiness of this well-known rule of 15 thousand for 15 years at expected rate of return of 15%.

“In How much time, the money I am investing today will become double.” It is a common question of many investors.

A simple rule of thumb to estimate the time taken to double the investment, assuming a fixed annual rate of return is called Rule of 72.

Suppose an investor invested in a debt mutual fund scheme and expected average return is 8% per year, the time taken to get the money double will be 72 divided by 8 is equal to 9 years. If you assume the rate to be 9% instead, then the time taken will to double the investment will become 8 years.

Value of money decreases with time due to inflation. Rule of 70 helps an investor to determine the value of his current wealth in future. 

Let us understand it with an example.

Suppose you have Rs 60 lakh and the current inflation rate is 5 percent. Divide 70 by the current inflation rate. 70 divided by 5 will be 14. As per the rule of 70 your current corpus of Rs 60 lakh will worth Rs 30 lakh in 14 years.

It is a thumb rule to determine the proportion of investment in equity and debt instruments.

To calculate this, subtract your age from 100, and the number comes should be the percentage you should invest in equities. The rest should be invested in debt or other safer assets.

Let us have an example-

Suppose your age is 35 and you want to invest Rs 100000.

100 minus 35 = 65

You should invest 65% of your money i.e., Rs 65000 in equity instruments and remaining in debt or other safer instruments.

B. Model investment portfolio for various Socio economic/ age group investors

Financial planners develop some portfolios of investment options for investors falling in different risk, age, earning capacity brackets. These are model portfolios.

Examples of Model Portfolios –

A.  Young call centre/ BPO employee with no dependents

Diversified Equity SchemesSector FundsGold ETFDiversified Debt FundsLiquid Funds

B. Young married single income family with two school going children

Diversified Equity SchemesSector FundsGold ETFDiversified Debt FundsLiquid Funds

C.  Single income family with grown up children who have not settled down

Diversified Equity SchemesIndex FundsGold ETFDiversified Debt FundsLiquid Funds

D.  A couple in their seventies, with no family support

Diversified Equity Index SchemesMonthly Income Plan (MIP)Gold ETFDiversified Debt FundsLiquid Funds