One’s age or risk tolerance may have an impact on the age-based mutual fund investment plan they choose. Creating an age-appropriate mutual fund portfolio will assist you in reaching your objectives.
Let’s examine how investors might utilize age-based mutual fund schemes to achieve their objectives at different stages of their life.
Investing in your 20s:
It is easier to commit funds for extended periods of time when you are commencing your investments at this age since you have fewer financial obligations and hence can take more chances with your investments. Starting early also has the benefit of allowing for mid-course fluctuations without significantly affecting your portfolio’s overall value.
As a result, if you are an aggressive investor, your mutual fund portfolio should contain a large percentage of equity funds—perhaps as much as 80%. Even if you are a cautious or conservative investor, you should allocate at least 60% of your portfolio to equities funds.
You can target stability and risk reduction through debt funds or basic bank fixed deposits, and invest just a percentage of your resources in debt funds or FDs that you believe you will use over the next three years.
Young, risk-taking investors may also choose to allocate 30% of their equity fund portfolio to small- and mid-cap funds. However, keep in mind that these funds are thought to be more volatile since they focus on a smaller selection of less well-known, less liquid and less traded equities. So, apart from your age, you also need to consider your risk appetite, irrespective of your age.
Investing in your 30s:
In your thirties, you are most likely married, well-established in your work, and have kids. On the one hand, advancing in your work career would result in more pay. On the other hand, you must support your dependents, which requires a little bit of extra money from your current income.
Longer-term objectives like owning a home, paying for your child’s education, saving for your retirement, all require investment. Debt mutual funds are crucial in this situation, particularly for preserving money needed for the down payment on a house loan, which may be three to five years from now.
Reduce your equity fund holdings somewhat in light of this shift in your living status; that is, the aggressive investor should reduce their equity holdings from 80% to 70% and the conservative investor from 60% to 50%. To increase total portfolio returns, aggressive investors can choose mid-cap and small-cap funds, while conservative investors should stick to diversified equities funds or large-cap funds, just as they would have in their 20s (but remember not all of your equity should go into mid- and small-cap funds. Despite you being an aggressive investor, there should be a balance between large-cap, mid-cap and small-cap allocation in your fund portfolio).
Investing in your 40s:
At this point, your living expenditures usually reach their height, but you may also be at the peak of your career or at least in the mid-management roles. You could still have certain medium-term objectives to meet, such as, your retirement, your children’s college education or wedding, your present home’s EMI payment, or a plan to purchase a new home (if you have paid off your prior home loan).
At this point, having a well-balanced asset mix is more crucial than ever. A prudent investor could choose for a debt allocation in your mix, that is 10–20% greater than the earlier allocations. The tone of an aggressive investor should also now need to slightly shift towards that of a conservative investor.
Investing in your 50s:
Except for retirement, you should have fulfilled the majority of your major financial goals by now. In your 50s, making sure you have a safe and happy retirement becomes your primary responsibility. You will now wait for the right moment to move your funds from risky equities to safer debt in order to protect your corpus.
If you are ten years or less from retirement, you should begin derisking by gradually moving money from equities to debt assets. It’s crucial to remember that not a complete switch from equity to debt is necessary; only a little amount must be changed at a time. Recall that even in your retirement years, you must have some exposure to equities, in order to stay up with inflation.
So, the amount of money you relocate to debt assets will be influenced not only by your risk tolerance, but also by whether you want to pursue a second profession after retirement. In the second case, you can risk a greater equity allocation than would be wise for your age if you plan to continue working after others may have hung up their boots. However, if you want to live off of your investments, you should reassess your increased debt allocation mix.
You cannot predict what will be the interest rate in the economy going forward, as you cannot lock-in the interest rate that you may get from the banks for your fixed deposits for a longer period of time. Therefore, build a portfolio to provide a steady income for oneself throughout retirement years, taking into account the current interest rate and the circumstances of one’s family.
You may also choose for the systematic withdrawal plans (SWP) of different mutual funds in addition to their monthly income plans (MIP). While SWP helps you earn continuous income from the mutual funds as you continue to withdraw units from the fund, MIP has a little exposure to equities, and they give dividends based on their performance that assist you meet monthly costs.
But again, as highlighted above, even after your retirement, you need to have some sort of exposure to equity, to fetch you inflation-beating returns, so that your corpus does not erode and you can get returns from your nest egg till your last breath.
Dive deeper with our article on investment strategies for every stage of life.
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