Portfolio Risk Should Decrease With Investor Age

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Various financial needs arise at various stages of every individual's life. When someone takes up a job for the first time, the objective is to be financially independent. Then as the individual progresses in life, various needs keep coming up, which may include buying a car, a home, getting married, starting and then raising a family, educating children, marrying them off and then building a corpus for a peaceful and financially independent life during the sun set years.

Then there are short, medium and long-term goals which need to be met through intelligent and disciplined financial approach. Within the mutual fund fold, there are solutions and products which can help you meet these goals of varied durations. And the solutions could be through the pure equity scheme route, a pure debt scheme route, or a combination of both. The solutions usually use gold funds or pure gold for meeting part of an individual's goals, as does other debt instruments and insurance products (see the case study by Sumeet Vaid on this page).

The basic premise on which life stage planning is based on is human life value, which as per financial theories, diminishes with age. Also life stage planning integrates the idea that as one grows older, the product focus as well as the assets one should invest in also changes.

At say 20, one's needs are different, so the goals should be different. Then again at 30, needs and goals are different and similarly when one is 45, 55 and 65 years and so on," explained a top fund industry official. At various stages of life, tastes differ, perceptions differ and financial goals also keep changing.

So financial planning should also change as per changes in all these factors.

Here the basic factor to take care of is as one grows older is that the risks associated with one's portfolio should come down, along with the volatility, financial planners say. To do that the proportion of debt in one's portfolio should go up with age and the proportion of equity would come down. The basic thumb rule to achieve this portfolio mix is that the percentage of equity in your portfolio should be one hundred less your age, and the balance should be in debt. If you can maintain this balance, naturally the debt portion would increase and the equity portion would come down as you grow older, and thus the associated risks and volatility.

The approach here should be nearer the goal, the percentage of highly volatile assets in the overall asset allocation should be lower. When the goals are much further, you can take more volatility in the portfolio. For example, for an investor if the goal is 20 years from now you can take more volatile assets in the portfolio than when the goal for the investor is just about five years away. So the portfolio volatility could be higher at the start of the planning process and diminish over time.

Another factor that is integrated within the human life value concept is that as one grows older, the life insurance one has would require should diminish while the allocation to debt for the same investor would go up.

In India, mutual fund houses offer various life stage products, while financial planners and advisors are also capable of mixing and matching various mutual funds and other products to give investors a portfolio that takes care of their goals during their lifetime. Other than the equity and debt funds from various fund houses that could be mixed within the same portfolio, there are specific plans from some select fund houses which can take care of an investor's needs to build a pension corpus, a plan to take care of children, investments in gold and also some touch with insurance.

PLANNING FOR FINANCIAL GOALS


ä The basic thumb rule is that the percentage of equity in your portfolio should be one hundred less your age, and the balance should be in debt

ä Besides equity and debt, a portfolio should also have gold and gold ETFs ä As one grows older, life insurance should diminish while the allocation to debt should go up

ä Other factors influencing the risk appetite of an investor should also be kept in mind while charting a financial plan for an investor

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