A Layman’s Guide to Lifecycle Based Investment

 

This is the second part of the blog “A Layman’s guide to Investment” which I started last week. When we do investing, many of us hardly give any consideration how our asset allocation should change with changing time and this is not a wise approach. So, in this blog I am trying to set few simple guidelines which you may consider,

1.       Age 25-30:  

 

Start investing at the earliest and increase your savings and investment as much as possible. This is usually the time when you have less family obligations and thus you can take maximum risks. Also, if you are salaried employee, try to increase your investment in Voluntary PF.

 

a.       Equity/MF Exposure:    50-60%

b.       Fixed Assed Exposure:  20-30%

c.       Other Assets:                  10-15%

 

                 Create separate buckets for important goals in life – like marriage, children’s higher education, buying home/car, holiday and retirement etc. The biggest mistake one can make is to use one fund for all purposes which has the great risk of exhausting your corpus much earlier and you will be facing terrible issues during critical times like retirement.

                

2.       Age 31-40:  

 

In this phase you are young parents, started a family or may be having little school going children.

 

You need to do the following tasks on priority at this stage,

 

i.         Buy a family floater plan even if you are covered by employer’s policy.

ii.       Start PPF in the name of your child (if you have already a running PPF and investing substantially, you can skip this step.)

iii.     Buy a Term insurance to cover your family for any unfortunate incident

iv.     Buy your own house to get rid of paying rent and peaceful future

 

             Suggested Allocation:

 

a.       Equity/MF Exposure:    40-50%

b.       Fixed Assed Exposure:  30-40%

c.       Other Assets:                  15-30%

 

3.       Age 40-50:  

 

In this phase your earning is maximum but so your expenditure. Please be careful to set aside corpus for your retirement separate. It should not be mixed with corpus for children’s marriage or higher education. Its also time when you buy an individual health insurance plan which will be easier to continue as your children are turning to adults and should have their own health insurance shortly.

                 Suggested Allocation:

 

a.       Equity/MF Exposure:    35-40%

b.       Fixed Assed Exposure:  30-40%

c.       Other Assets:                  20-35%

 

Also, now its high time you realize your big-ticket goals for which you have kept aside funds since you had started investing, like buying that home or car if it is not done already.

 

4.       Age 50-60:  

 

You can continue with the same asset allocation for initial 3-5 years, but when you will be coming closer to your retirement, switch most of your equity based mutual fund to dividend yielding debt funds for safety and for regular monthly income. Do this 2-3 years before your retirement and when market condition is good.

               For succession planning, create will so that after you are gone, your wealth can be distributed among your dependents without any confusion. You can take legal opinion or now-a-days there are different websites through which you can create online will as well. Explore few Indian websites for this purpose is – www.willjini.com, www.ezeewill.com  and understand services provided by them.

 

5.       Retirement:  

This is supposed to be most peaceful and happier part of your life. If you have invested for long, by now, you should have a sizable corpus. Also, if you were salaried, during your retirement you should have got another round of cash inflow in terms of PPF/NPS/Gratuity/PF etc. Invest them wisely across different types of assets too. I will suggest even at this phase you should keep invested in equity (though small amount) as it will help growing your corpus. Also explore schemes which are specifically targeted for senior citizens – like current Senior Citizen Savings Scheme (SCSS).

 

If you think you are still hard pressed for money, try to sell your home and shift to TIER-II or TIER-II cities which now also have good infrastructure and health facilities.

             Suggested Allocation:

 

a.       Equity/MF Exposure:    15-20%

b.       Fixed Assed Exposure:  50-60%

c.       Other Assets:                  20-35%

 

Last but not the least, (though it’s not exactly financial planning), I would also suggest that you should pledge to donate your organs as every year thousands of young people die due to unavailability of critical organs for replacement. Now the process has become as easy as contacting NGOs/Public Health System or even online declaration. You can explore the below website as they are doing good work in this field.

www.mohanfoundation.org