You need to build a mutual fund portfolio that suits your age to ensure your risk-return ratio is appropriate
Investors set financial goals and plan their investment strategy to realise them. Some commitments may be in the near future while some other goals may be long-term. It could vary from saving for a house, funding children's college education, planning a vacation abroad, buying a vehicle, to augmenting for retirement. Inadequate exposure to equity can ruin your long term returns owing to the inflation monster. A safer option that mitigates risk, yet harvests the returns of stock markets, is the mutual fund.
Mutual funds are professionally managed instruments that offer innumerable schemes for investors to choose from. Based on your age and risk appetite, you should decide on your exposure to equity and debt.
Thematic funds can be placed on the higher end of the risk spectrum. They invest predominantly in securities representing a particular investment strategy. From infrastructure to financial services, the investment theme is based on a broader social or economic trend. Debt funds that invest in short term or long-term bonds, money market instruments or floating rate debt have capital preservation as their main objective. They fall in the lower end of the risk spectrum. Between the two extremes investors have a plethora of schemes with various levels of exposure to risk, to choose from.
Your mutual fund portfolio must be in sync with your age and risk appetite.
Here are a few investment tips based on age:
For young investors
Usually, at the beginning of a career, the young investor earns only a modest amount. But he holds tremendous potential for growth up the ladder and has many decades of working years ahead of him. That sets the young investor apart as aggressive and willing to take risk with his hardearned money.
There is an increasing trend among young investors to start investing for their dream homes instead of waiting till they get married. Their initial high risk portfolio allocation can shift with age, contingencies or monetary commitments.
This may be the best time to rely on a systematic investment plan (SIP) to realise your long-term financial goals. Starting early gives you a tremendous edge in meeting your objectives. A SIP allows you to invest in mutual funds regularly, say every month or quarter. Some mutual fund schemes also give the investor an option to invest daily, weekly, fortnightly or once every five days etc. You buy units of a particular mutual fund, regardless of its price and build wealth over the long term. While you benefit from rupee cost averaging, it also eliminates the need to time the market.
For middle-aged investors
An investor in his late 30s to early 40s has to shoulder greater responsibilities. He might have to take care of his family and his aging parents. Apart from this, he must save for his children's higher education, marriage expenses and health needs of his dependents. His risk appetite mellows down with more financial responsibilities. He is less aggressive than a young investor.
A balanced fund is a combination of stocks and debt instruments like bonds that provide both income and capital appreciation while avoiding excessive risk.
He is burdened with huge debts often including home loan, personal loan, vehicle loan, medical bills and credit card dues. At this stage in life, it becomes important to manage finances well to avoid financial crisis and a debt trap.
This is an ideal time to build a retirement corpus preferably with SIPs that can digest market volatility. The middle aged investor also invests in gold, bank deposits and other debt products deemed safe.
Nearing retirement
An investor in his early 50s, has typically discharged all his duties and financial commitments. He would have ensured that his children's education and marriage expenses are
met. His loans and other major debts would have cleared by now. The only goal would be to save for life after retirement.
With life expectancy increasing, people need a considerable retirement corpus even if they are prepared to scale down their lifestyle. While recreation, debt repayment and grocery bills may take a nosedive with children moving out, older people may see a spike in medical bills. The cost of quality healthcare has skyrocketed. So many people are forced to work even after retirement to keep the house running due to insufficient retirement funds.
Investors nearing retirement years must maintain exposure to equity to beat inflation from eating into their returns.
Typical allocation ratio:
Debt 20 percent. Equity 80 percent.
Choice of funds:
Aggressive midcap, small-cap and thematic funds
Typical allocation ratio: Debt: 40 percent. Equity:
60 percent.
Choice of funds:
Mid-cap funds, balanced funds, large-cap funds and index funds, apart from debt exposure.
Typical allocation ratio:
Debt: 60 percent. Equity: 40 percent.
Choice of funds:
Debt funds, balanced funds and monthly income plans
