There are so many things to take note of before investing but we have shortlisted these 5 things you must know before you start investing.
1 of 5- Power of Compounding
We all know the 7 wonders of the world but Albert Einstein said that “The Power of Compounding” is the 8th wonder. Let’s take an example- Warren Buffett became a billionaire at the age of 51 while currently at the age of 86 he has a net worth of $76.1 billion. There are various examples pertaining to compounding which proves the magic of compounding.
2 of 5- Rule of 72
Have you ever wondered how quickly you can double your savings? How quick your money will be doubled. The last time I heard that it sounded like a Ponzi scheme. Well, this one is not.
Rule of 72 tells you in what time will your money be doubled. To calculate that time period you have to divide 72 by your interest rate. So let’s assume you invest Rs 100 in a savings bank account with interest rate of 10% annually. So you divide 72 by 10 which gives you 7.2 years. Which means that your money will be doubled in 7 years and 2 months. For example, if a mutual fund or portfolio has given around 20% returns in the last 3 years, then in 3.6 yrs (72/20%) you will double your money.
3 of 5- Rule of 100
A very simple rule stating that 100-your age should be your allocation to equities. Rest should be in debt securities. This rule has some inherent limitations but if you are thinking of retiring at the age of 60. Then this is the best allocation of your capital.
Let’s take an example of a 35-year-old person who has followed the above rule. Then his portfolio will look similar to this
Whereas, someone in his mid-50s will have an asset allocation like this
4 of 5- Debt is a Hanging Sword
The early you realize that debt is a big liability and if not taken care. It can destroy your whole wealth. Warren Buffett says,”built your wealth by getting interest to work for you instead of working to pay interest.”If you have high-interest debts(more than 10%), you should be paying those off as your highest priority, far above any sort of thoughts about investing. Hence, always avoid taking debt especially credit cards. Learn here about home loan vs mutual fund investments.
5 of 5- Systematic Investment Plan(SIP)
You should always have a disciplinary approach towards investing i.e. invest regularly. In this way, you don’t have to even time the markets i.e. buying at low and selling at high because technically you have invested in every phase of markets. Another benefit of this is, your cost of acquiring stock or units(in mutual funds) gets averaged out. Here is the example of best mutual funds for SIP investment