24 Jun 2022
When it comes to matters of money, a very basic piece of advice that everyone would have is that one should save for a rainy day. With time, this advice transformed into how savings can be grown with the help of investments.
Investing then transformed from a ‘can do’ to a ‘must do’ because failing to do so would erode the real value of money when one takes into account inflation. This, in turn, impacts, spending capacity.
Gradually, asset classes, as well as methods of investing, have evolved. Equity, fixed income, real estate, precious metals, art, and commodities are some of the various assets one can invest in.
Of these, equities are generally seen as a volatile and risky asset class, making investors wary of how they should invest in this asset class.
For asset allocation, that is, deciding how much an investor should invest in each class, there are a few general and well-known pieces of advice.
Let’s discuss one of these today – the rule of 100.
The rule basically means that an investor’s allocation in equities should be 100 minus their age. So an investor who is 25 years old should invest three-fourths of their portfolio in equities, while someone who is 60 years old should put in 40% of their money in equities.
The basic premise of this rule is that the older an investor is, the lesser they should invest in equities, gradually moving to relatively less risky asset classes such as government bonds, fixed deposits etc.
While the ‘rule of 100’ is, in fact, one of the most followed advice when it comes to investing in equities, it does have its share of criticism. The most common among these is that this adage takes into account only a single factor – age.
So even though this advice would show that two individuals of the same age should have the same percentage of their portfolio invested in equities, it may not necessarily be the best advice given that they could be in completely different circumstances.
There are some more general and well-known rules and tips related to investing, which we will explore soon. Till then, happy investing!
This article is for information purposes only. The information provided herein is derived from public sources, believed to be from reliable sources. However, no representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. Views expressed herein involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. Kotak Mahindra Mutual Fund/ Kotak AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in future. Readers should seek professional advice before taking any investment-related decisions and alone shall be responsible for any decision taken.