Thumb rules for investment

Anil Chopra

Every individual is unique and has different financial goals, risk-taking appetite and attitude towards saving/investment. However, there are certain fundamental principles of investing which are universally applicable to “one and all”. These principles are also referred as “Thumb Rules” in general parlance.

We are sharing below certain thumb rules which must be kept in mind before making investment/financial decisions.

How much should YOU save

Your monthly savings must be at least 30% of your take home salary/income. Take home salary is computed as net salary after statutory deductions like provident fund and TDS etc. For example, if your gross monthly income is Rs 1 lakh and your take home salary after tax/PF is Rs 70,000 then you must save at least Rs 21,000 every month for investing in your medium to long term goals.

Savings account

Not more than two times of your monthly household budget expenses. If your household expenses budget is Rs 50,000 pm, you should not keep more than Rs 1 lakh balance in your savings account. Please remember that generally savings bank accounts earn interest @ 4% pa and that is not enough even to beat inflation.

Investment in gold

Ideal allocation to gold is around 10% of your financial portfolio.

Financial portfolio includes bank balance, fixed deposits, post office schemes, mutual funds, bonds, shares and stocks etc.

Accordingly, if your financial portfolio (without adding the value of house) is Rs 1 crore, maximum exposure to gold including Gold Mutual Fund or Gold ETF should be Rs 10 lakh. If your investment in gold is less than 10% of your financial portfolio, you may invest in Gold ETF or Gold Mutual Funds rather than buying physical gold which carries risk of being stolen. On the other hand, if your current investment is higher than 10% of your financial portfolio, then at least do not make any fresh investment in gold until your financial portfolio grows and exposure to gold comes down to around 10%.

Allocation to equity

Thumb rule for investing in equity is “100 minus your age” should be the allocation to equity. For example, if your age is 30 years, you may invest up to 70% (100 – 30) of your savings into equity through Equity Mutual Fund Schemes of reputed Asset Management Companies.

Similarly, if your current age is 60 years, you should not invest more than 40% (100–60) of your savings in equity-oriented schemes. As your age continues to grow, you should reduce your exposure to equity.

Debt schemes

As already mentioned, around 10% should be invested in gold, 100 minus your age should be invested in equity and balance should be invested in debt schemes like PPF, debt mutual funds, FMP, bonds, bank deposits etc. For example, if your current age is 50 years then you should invest 50% in equity (100–50), 10% in gold and balance 40% in various debt instruments.

Life insurance coverage

The thumb rule for life insurance coverage amount is at least seven times of your annual income. If your annual salary package is Rs 15 lakh, you must have “sum assured” of at least Rs 1 crore in one or more life insurance plans, including term plan, ULIPs and traditional plans.

Health insurance 

For single individual, with no dependents, health insurance coverage of Rs 2 lakh is enough. However, for any couple with or without kids, health insurance coverage should be for minimum Rs 5 lakh and if your old parents are also alive and dependent on you then you must take a family floater plan of Rs 10 lakh.

Mutual funds

If your monthly savings is Rs 10,000, you must have minimum two SIPs of Rs 5,000 each. One in large cap and another mid cap. If your monthly savings is Rs 25,000, you should have five SIPs of Rs 5,000 each out of which two should be large cap, one mid cap, one flexi cap and the last one can be in sectoral SIP like banking or infrastructure etc.

Portfolio review

The thumb rule for reviewing the portfolio is once every three months if your portfolio is larger than Rs 50 lakh and at least twice a year if your portfolio is less than Rs 50 lakh.

Above thumb rules are shared for reference purpose only and to ensure that you should not go “off course” in your journey of wealth creation and achievement of your financial goals. You must consult a certified financial planner or a subject matter expert for taking important financial decisions.

The writer is Group Director, Bajaj Capital. 

The views expressed in this article are his own