Asset allocation is one of the key factors that every investor needs to understand while investing money on a regular or periodic basis. It plays an important role in planning your retirement future, as money invested in the correct financial instrument will lead to good wealth. The biggest question investors always have in mind while investing money is: what percentage of their total savings should be invested in equity or the share market?
As we know, one should not put all their eggs in one basket, and similarly, one should not invest all their money in one financial instrument. For a good rate of return or wealth, one should always focus on diversifying the portfolio so that in case of any sub-prime crisis (all the mortgage sector crashed) kind of scenario, at least investors get a good return from other financial instruments based on a diversified portfolio.
Equity investment requires lots and lots of planning and fundamental and technical analysis as the percentage of risk is higher than in any other mode, but one should not forget that if the risk is high, the rate of return is also high. Investing wisely, or we can say a calculated investment in good stocks or equity, helps in achieving retirement goals as early as possible. Rule 72 helps determine the doubling period of an investment. Equity investments will double the investment as quickly as possible compared to fixed deposits.
What is Rule 100: Age?
It is one of the oldest and most important rules or tools used by portfolio managers and financial leaders to determine the percentage of funds allocated to equity based on risk appetite and the capacity of investment based on earnings. Age is one of the key factors used to calculate the percentage of asset allocation by subtracting it from 100. So in simple language, if an investor is investing Rs 10,000 per month and their current age is 30, then on the basis of Rule 100: Age, the investor should invest 70% of the money, which is Rs 7000, in equity and the remaining 30%, which is Rs 3000, in a fixed rate of return, or one can opt for other low-risk diversified portfolios like fixed deposits, public provident funds, mutual funds, bonds, etc.
Based on the above example, subtracting Rule 100-30 (AGE) will give investors an overview of what percentage of their retirement assets should be in risky investments, which is 70% in equity or the share market, and what percentage of their retirement assets should be in safe money or no-risk financial instruments. The ideal approach is to diversify 30% of the investment into multiple financial instruments so that investors can benefit from different rates of return and increase their wealth.
Formula to Calculate RULE 100 - AGE :
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| Asset Allocation |
Below is the list of different types of risky and safe instruments that are currently available in the market, and investors can opt for or choose from any or many based on their risk appetite and earnings.
Safe instruments are secure in nature with a fixed rate of return, and some also provide tax advantages to investors. However, there is always a chance of a potential withdrawal penalty if withdrawal is done before the maturity period, the return percentage is also minimal, and there is a high chance of inflation risk, or we can say that based on the time value of money, the return will be less wealthy. Risky instruments, on the other hand, are totally share market (global) based, including tax advantages like ELSS (equity linked schemes), along with a highly liquid form of fund compared to safe instruments. Also, as the percentage of risk is high, investors can think of a high rate of return percentage, which will suffice the inflation needs by generating good wealth.
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| Decision Based Upon Risk Appetite |
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