Read in: 1min, Published On , 14 Aug 2017 By ET Wealth
RULE OF 100 - Your Age
This is the thumb rule that gives you an idea about the ratio of equity and debt that should be in your portfolio. Going by this rule, 100 – (your age) should be the percentage of equity you should have in your portfolio. As you grow, this percentage will come down which gels well with the theory that older you are, lower should be your equity investments. The corollary to this rule is that the percentage equivalent to your age should be your debt investments.
RULE OF 72
It gives you an idea about the years it would take for your money to double, provided you know the rate of interest or the rate of growth you earn in your investment. All you need to do is divided 72 by the rate of interest/growth.What you’ll get is the number of years in which your money will double. Say you are earning 8% rate of interest in your debt fund. Then 72/8 = 9 years it would take for your money to double. Seen another way you want your money to double in six years. So 72/6 = 12. So you have to invest in a financial product that grows at 12% annual rate for your money to double in six years.
HOW COMPUNDING WORK
Often called the eighth wonder of the world, this works best if you stay invested for several years (and not months, weeks or days). The main principle here is that over time, you earn interest on your invested fund. In the subsequent year you not only earn interest on your invested funds, but you also earn interest on the interest you earned the previous year. If this cycle is allowed to continue for several years, the whole corpus will grow to be of a very large size.
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