Hello friends, I Jagdeep Singh, Welcome you to Groww's Youtube Channel
I thought let's make a learning video for you this weekend and answer all your doubts in a simple manner
Like I told you, today's video is completely on educational purpose
I am going to talk about the 3 simple rules that every investor should be aware of
These 3 rules sound easy but can play a very important role in improving your investment
Let's start with today's video a start and talk about the first rule which is very important to you as an investor
Friends, say you have 10 lacs in hand and are thinking of investing it
but you don't know which assets to put it in which fulfills your requirements
First, let's talk about the requirements. If you have 10 lakh today
after 6 years you want to buy a car for 20 lakhs
so to get 20 lakh rupees you will have to invest in such an asset which will double your money in 3 years
Now the confusion here is what is my required rate of return
How will I know in how many years my money will double itself
The first rule is Rule 72. It determines how long an investment will take to double at a rate of return
Now I would want to break it up and explain it to you in a simple manner
This rule tells you if you divide your return with 72, the return from your investment
is equal to the years taken to double your money
Now say you are going to invest in such an asset which you think will give you a fixed 9% return in a few years
if you have an asset which indicates your fixed return at 9%
this rule can directly tell you the years taken to double your money
Like 72/9 = 8, which means in 8 years your money will get doubled if you invest in an asset with min 9% return
year on year
I will go back to my first question, I want to buy a 20 lakhs car after 6 years with Rs 10 lakhs now
which means I want to double my amount in 6 years, the return required here would be 72/6=12
means if you want to double your amount in 10 years, you will have to invest in an asset/stock/mutual fund
which gives you an annual return of 12 %
This rule helps a lot in your decision making, you can quickly calculate and see in the coming years
What are your requirements, in how many years you want your money doubled
what should be your required rate of return according to it
cause if you know what your required rate of return is then you can even estimate your risk, both are linked
but I would prefer that first you see your risk and then assess which asset should you invest in
For mental calculation, 72 rule can be useful for any investor which is very simple. I will recap it again
72/Rate of Return = No. of years taken to double your money
Friends, let's talk about the second question which comes to an investor's mind when he starts investing
this question is it is said how important it is to diversify while making a portfolio
If I talk about basic diversification, what major investors think of is how much to keep in Equity and Debt
so that you can diversify and your risk gets neutralized for equity investment
but the big question faced by investors is how much he should invest in Debt and how much in Equity
Anybody can tell you if your risk-taking capability is high then keep more of your investment in Equity
and to take lesser risk put more in Debt
Risk is directly correlated to equity and debt but how can we relate it with age.
A simple formula which will tell you how much to keep in debt and equity in your portfolio
100 - age formula directly answers you in terms on no. on how much can you invest in debt and equity
Now say your age is 30 years then 100 - 30 = 70, it says that 70% of your portfolio should be in Equity and
30% of your portfolio should be in debt
Another example, say if someone's age is 60, then 100 - 60 = 40
so this 40 says that 40% of your portfolio should be equity and 60% in debt
This simple rule tells you on how your investment portfolio should look like
If we talk about the logic behind it then
From the first example I took of 100 - 30 when his age was 30, he was asked to keep 70% of portfolio in equity
When a person is younger, his risk-taking appetite might be a little more
because of which he is asked to invest more in equity
but as the age increases, time horizon to invest and risk-taking appetite decreases
Like we took the example of age 60 years, which asks to keep 40% in equity and 60% in debt
thus risk appetite, time horizon, and your goals become very important for bifurcation
but 100 - age rule tells you in a very simple manner on how much you should allocate in Equity and Debt
of your total investment portfolio
Friends, let's talk about the third rule which explains you about the personal finance very simply
A lot of people say that they do get money, salary but the biggest question is on how to utilize them
on how much to invest, how much to spend on basic needs. This rule tells you all about personal finance
This rule's name is the 50-30-20 rule. This rule tells you how to manage your personal finance
Now take this example, say your salary is Rs 100, after paying all the taxes you receive Rs 100
Deduct the tax from your salary and only consider your in-hand salary
Say if you have Rs 100 in form of your paid check salary after every month. How much should you spend here?
Friends, there are two types of expenses. First is basic expenses also called necessity which can't be ignored
like house rent, grocery and many other basic expenses which can't be ignored and you will have to spend
so out of your Rs 100 salary, you should keep Rs 50 for basic needs like rent, groceries, petrol for commute
try to maintain your basic expenses in Rs 50 and should not go beyond it
Friends lets talk about wants. What are these wants?
After basic activities, there are certain activities which cannot be ignored in our personal life
the expenses which can be avoided but we don't avoid them as it is according to our standard of living
in order to avoid them, we might have to face inconvenience,
an activity which can be avoided with a bit of inconvenience is considered to be in wants
Your wants can be your move tickets, trip expenses, shopping. These arent your basic necessity but you need
and with a bit of inconvenience you can leave them
out of total salary, 50% you took out for basic needs after which 30% you may spend on your wants
Now the rest 20% is very important for any common man on what he does with that 20%
the mistake with many people do is spending the left 20% on wants cause of which they cant do investment
This rule clearly states 50% is spent on needs, 30% on wants. Now the 20% must go on savings & investments
Now two things come out in savings & investments, first savings where you should have your emergency fund
so that in a state of emergency you have some money to spare thus you should allocate a part of 20%
the money left should be completely used for investment
Now how to invest should be on the basis of the previous two rules which I explained
You can use 100 - age rule and bifurcate your money
and the 72/return can tell you in how many years you can double your investment
so you can see how integrated these 3 rules are, this can help you to save and manage your personal finance
Many people might have this question, that I have a loan and where does this loan fall under the 50-30-20 rule
so, friends, your debt repayment or loan should be paid off from your last 20%. You can learn another thing here
that your EMI should not be so much that it spoils your personal finance plan
thus its a very important concept and can help everyone in managing the personal finance
Friends, today's video was purely based on educational purposes
It was our motto to tell you something important on personal finance and investment
so that you can study, plan your investment and choose a good stock, mutual fund, debt instrument to invest
and make a good return. If you make a good return, your future would be safe and secure
That's why it is important to be financially literate
which requires you to study from time to time and try to watch our videos and not miss them
Friends, if you have not subscribed to Groww's Channel yet, Subscribe It!
If you liked this video, Press Like!
Comment and tell us what topics should we cover in the coming days
Happy Investing!