Skip to main content

Asset Allocation strategies for different age groups

 
Asset Allocation article in Advisorkhoj - Asset Allocation strategies for different age groups

Asset allocation is the most important aspect of financial planning. A lot of investors allocate a sub-optimal proportion of their portfolio to equities. This is because the risk appetite of investors in India is low. However, it is very important that investors and financial advisers understand the distinction between risk appetite and risk tolerance. Simply put, risk appetite is the investor's willingness to take risk, whereas risk tolerance is the investor's ability to take risk. We have discussed the difference between risk appetite and risk tolerance in our article, Measuring Risk Tolerance of Investors.

There are several important factors that determine the risk tolerance of an investor:-

  • Income and Expenses of the investor

  • Liquid (cash savings) of the investor

  • Short term financial goals

  • Long term financial goals

  • Insurance cover (both life insurance and health insurance) of the investor

Even though risk tolerance is the most important logical foundation of asset allocation strategy for financial planning, from a practical standpoint, one cannot wish away the influence that risk appetite has on a person's investment style. In this article, we will discuss several asset allocation strategies that suit different investment styles. Ideally, investors should determine for themselves the asset allocation strategy that is most suitable for their short term and long term investment goals. They can also consult with their financial advisers, as to what strategy is most suitable for their investment considerations.

  • Rule of 100:

    This is a very popular thumb rule for measuring risk tolerance. Simply put, you should subtract the investor's age from 100, and the result suggests the maximum percentage amount of the investor's portfolio that should be exposed to equities. So for a 25 year old investor, this rule suggests that 75% of his or her portfolio should be invested in equities, and for a 40 year old investor, this rule suggests that 60% of the portfolio should be invested in equities. This is the conventional asset allocation model, and is ideally suited for a passive investor. The table below shows the asset allocation guidance for different age groups.


  • Rule of 120

    This is a modification of the "Rule of 100". This strategy calls for a slightly more aggressive allocation to equities. We are living longer, thanks to better healthcare facilities available to us, more awareness about healthcare needs, and better dietary habits. If we are to live longer, then a logical consequence is that our post retirement life is also longer, which means that we need a greater allocation towards equities to take care of income requirements in our longer post retirement lives. How does it differ from the "Rule of 100"? You subtract your age from 120 to figure out how much of your portfolio should be allocated towards equities. The table below shows the asset allocation guidance for different age groups, as per this strategy.


  • Risk Aversion investment model:

    Naturally, we are all risk averse. Nobody wants to lose their hard earned money. However, the degree of risk aversion is different for different investors. Investors with a higher risk appetite will be more comfortable with short term volatility than investors with low risk appetite. If your risk appetite is zero, then you should avoid equities. But bear in mind, you will not be able to create wealth from your investment. You will have to rely on more savings from your current income to create wealth. On the other hand, if your risk appetite and risk tolerance is moderate, you should go for an appropriate mix of equity and fixed income in your portfolio, in line with their short term and long term cash flow requirements. This strategy, in some cases, is suitable for new entrepreneurs, who want a degree of safety, with regards to their investment portfolio, because they may need to deploy their investment at any stage to meet their business requirements. It may seem strange, that we are associating this asset allocation model with entrepreneurs, who by nature are high risk seeing individuals. However, these individuals may not always entirely rely on the growth of their investment funds to fund their business requirements, but rather depend on them to meet their liquidity requirements from time to time. The table below shows the asset allocation guidance for different age groups, as per this strategy.


  • Risk Loving investment model:

    While nobody wants to lose their money, investors who can rely on income from sources other than their own investments for their living and other expenses, can afford to take higher risks. As per the fundamental rule of Finance, higher risk also translates into higher returns. Investors with a higher risk appetite will be more comfortable with short term volatility than investors with low risk appetite, and will be comfortable with a longer investment horizon. Typically, there will be two kinds of investors, who fall in this category. (1) Investors with high net worth, with a very long time horizon for equity investments. (2) Investors with low net worth and who are willing to risk, because the capital at risk is smaller. The table below shows the asset allocation guidance for different age groups, as per this strategy.

Conclusion

There are no hard and fast asset allocation rules for investors. Asset allocation for investors depends on a number of factors. These are, as stated above, Income and Expenses of the investor, Liquid (cash savings) of the investor, Short term financial goals, Long term financial goals and Insurance cover (both life insurance and health insurance) of the investor. Financial advisers should advise and educate the investors, with regards to their asset allocation strategies. Investors should also educate themselves about different asset allocation methodologies and decide for themselves, which one is suitable for the long term growth of their wealth.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Bharat Bond ETF

Top SIP Funds Online   The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it. The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio'). The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations. But does it make sense for you, the investor, to invest in it? Lets find out. What is the product? As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 ye...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now