So you want to invest in equity markets but don’t know how much of your folio should you invest in equity. You might have heard about the 100 – age rule. But that is just a thumb rule that is pretty general. The nuances of equity investing cannot be captured by any thumb rule (except that long term is definitely better in equity investment.)
Are you even ready for equity?
Before you jump the gun and invest in equity, you must ask if you understand the risks. Equity by its very nature are riskier than a fixed deposit or other debt instruments. In the short run (<4-5 years), the prices of equity investment will fluctuate a lot. And as luck has it, most of the first time investors see losses in first few years. That is the reason people quit equity market to never come back and lose out on the opportunity. If you are a first time investor then mutual funds are the right option for you. You might want to look at my recommended mutual funds for 2019 in India.
So what is the right amount to put in equity?
The amount or percentage of your portfolio depends on your goals. If your goal is to retire early, let’s say by 40-45 and you are already 30 then you need a large portion of investments in equity (I would say around 80% initially). If you are saving up for a purchase or travel in the next 6 months or an year, may be a debt fund works better. Hence, rather than a thumb rule you should use the following steps to decide how much to invest in equity:
- What is the goal you want to save for?
- What is the amount you would need to attain that goal and in what time?
- Basis the above two questions, how much rate of return would you need?
- Decide the allocation basis average rate of return from equity and debt. You can assume an average return pre-tax of ~12% for equity mutual funds (for >6-7 years) and ~8% for debt instruments.
Do let me know what do you think about my thoughts on how much to invest in equity.