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Age based financial planning requires different approach

WITH financial planning taking firm roots among investors, the concept of asset allocation is no longer an alien one. There is, however, some confusion of its actual application in the process of continuous investing. Investing is a continuous process for investors in their working years as they keep generating fresh investible surpluses from their earnings.

How to apply dynamic asset allocations?

Asset allocation disciplines an investor as it compels her to think clearly and decide on how much to invest in equities, debt, gold and other asset classes. But it is not a one-time process since dynamic, age-based financial planning requires her to allocate different percentages every year or every few years.

The question facing such investors is whether the new asset allocations should be applied only to the fresh investible surplus or also to the existing, accumulated investment portfolio from the previously-allocated percentages. There are two views on this.

■ Applying new allocations to accumulated investments as well:

One view is similar to portfolio re-balancing. Says Rahul Mantri, certified financial planner and founder of Midas Touch, a Pune-based advisory firm, "We provide new asset allocation advise to our clients after an interval of five years and we advise the new allocations to be applied to both – existing portfolio as well as to any new investible surplus from There on." In Mantri's firm's asset allocation rejig, equities get lower percentages as the client's age increases. "You need to skew your entire portfolio towards debt as you approach the retirement age of 60. When you reach retirement, we believe equities should not make up for more than 10 per cent of your accumulated portfolio," says Mantri.

■ Only on fresh investible surpluses:

There is another view that says changing asset allocations should not be applied to earlier investments and should only apply to new investments made from new investible surpluses. So, for instance, a new investor, say 27 years old, invests Rs 50,000 for the first time and of this, she deploys 60 per cent in equities, 30 per cent in debt and 10 per cent in gold. Say, she follows these same allocations every time she has fresh investible surplus from her annual salary. But when she attains 33 years of age, she decides to tweak her allocation ratios to 50:35:15 in equities:debt:gold.

Her current portfolio, accumulated over the previous five years, would have grown to some amount. But she will not touch this portfolio to apply the new allocations although she may want to rejig existing securities in each asset class based on her chosen investment philosophy for each asset class from various styles such as `buy and hold' and `book profits in some and re-invest in other'.

She will, instead, apply her new allocations only to the investments she makes from the new investible surpluses she generates from the salary she earns in her 34th year and thereafter. After five years, when she is in her 39th year, she may decide to apply newlychanged allocations to her investible surplus from her 39th year salary onwards.
This cycle will continue.

The justification here is that an equity exposure taken when she was 27 years old will fetch her far higher annualised return than any new investible surplus she deploys in equities in her 40s and 50s. 

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