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Lifestage Planning with Mutual Funds

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Mutual funds can be good life stage financial planning tools.

However, decision making becomes complex because of the number of investment choices that are available to us.

For instance, we get confused in selecting the right type of scheme.

Should i invest in equity schemes also? or in debt funds because they are relatively secure. Or in Balanced Funds that give the best of both?

Let us make this decision making easy with Life Stage Planning.

This method is the best method for whom investing is a once in a year activity.

Assume my age is 25 years.

I can put 25% of my investment corpus into debt mutual fund schemes.

The remaining ie 100% - 25% = 75% can be put in Equity Mutual Fund schemes.

For instance, if I have Rs. 10000 that can be invested, i wil invest 25% of this money i.e 25% of Rs 10000 = Rs 2500 into the selected debt scheme.

The balance amount, i.e Rs. 7500 can be put into the selected equity scheme.

You need not have to think much in the selection of the schemes.

A good performing debt scheme (preferably an income scheme or a dynamic-bond scheme) and a good performing equity scheme (such as a Diversified Multicap scheme) are sufficient.

Re-balancing Every Year

Now assume you celebrated your 26th Birthday.

Unfortunately, you are out of cash to do fresh investments.

Now what to do?

You just have to re-balance.

You can do a SWITCH transaction to switch the 1% of amount from the equity scheme to the debt fund.

This method of shifting of amount is to be done every year as we grow older.

If you are an active investor, this re-balancing act can be done periodically, say, every 6 months or 1-year.

This methods works out for those who want a simple investment life much complex mix of schemes.

However, most investors cannot resist from adding more than 2 schemes.

The premise of this method is that equities over a long period of time will give far better returns than other traditional asset classes.

Perhaps, we can start this investing method for our kids because they start with single digit age.

Or when we are planning to build a retirement corpus.

The re-balancing (switching from equity to debt) is necessary so that by the time we retire, we do not worry about stock market fluctuations and the funds are secured.

Debt funds are relatively more safer than equity funds.

Hence, as we get closer to retirement, our retirement corpus becomes more and more secure and clearer.

Also, when we are switching from equity scheme to debt scheme, we are in a way, doing profit booking periodically.

All switches from equities after 1-year are tax free.

In fact, one can start the life stage method of investing right from Day 1 he becomes employed.

Even 30s or earlier if possible is not a late time to start.

By the time we retire, we will automatically be having substantial portion in debt funds.

Question on Asset Allocation

My age is 29 and as per basic rules, my 71 percent should be in equity and rest in debt fund gold n real estate I guess..

Now in 71 percent of equity how shd I distribute in specific stocks, large cap mf, Midcap and small cap mf ?

Answer

71% in equities is right.. Within equities, the allocation to various market caps depends on your financial goals and investment horizon for each of them.. The general method followed is that we start with smallcaps ... and as the goal gets closer, move to midcap caps and when the goal is like 4 years due, move to largecaps and finally, in the last 2 years, move to arbitrage / debt schemes.. So it is like a transformation from high risk to low risk as we go closer to the goal.

But investing all 70 percent in small cap isn't risky?

For long term goals, using MF, it isnt.. For instance you might have a goal like buying a flat, kids higher edu etc. then SIP in them is the preferred choise. Of course, that is not the only goal.. For instance, we use ELSS schemes for tax saving which are equity schemes that are mostly largecap + midcaps

In general, we use multicap / largecap equity for 5 years; midcaps for 5 - 8 years and smallcaps for 8+ years

A best way of planning these things is to determine and set financial goals.. How much corpus is needed at the end of 10 years, how much in 20 years and so on. And based on the result, one can determine the right type of mutual fund scheme.

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