Difference between revisions of "Lifestage Planning with Mutual Funds"

Revision as of 01:47, 3 June 2017

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 releatively 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.

Rebalancing 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 rebalance.

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.

Related Topics

• Building a Child Education scheme using Mutual Funds
• Mutual Fund plan for a just retired person
• Retirement Planning with Mutual Funds
• SIP vs Lumpsum Investments
• Open-ended, Close-ended and Interval schemes
• DIRECT plan vs REGULAR plan
• GROWTH option vs DIVIDEND option