Difference between revisions of "Lifestage Planning with Mutual Funds"

Latest revision as of 09:43, 4 June 2018

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.

How to do the rebalance?

As discussed above, rebalancing is the process of shifting money from one asset class to another asset class in accordance to our financial plan.

When, we wish to move money from Equity to Debt, there are so many strategies and ways one can do.

One simple method is to switch money from the Equity to an Equity-oriented Balanced fund or to a Debt-oriented Balanced Fund or even to be better secure, to an Income Fund.

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.

Asset Allocation for a 20-year old

Life stage model is the best method for a person starting to invest early.

Assume you are 20-years old.

So, as much as 80% of your money can be in Equities.

20% can be in debt or such safe asset classes.

Within the 80% in Equity, allocate a substantial portion for Mutual funds - some thing like Smallcap Mutual funds.

The rest can be put into ETFs or Index Funds.

Keep the Direct Equity Shares allocation to a low and gradually increase as you gain experience.

Use your birthday to recheck, revise and re-balance your portfolio and move 1% from Equities to Debt.

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