Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment
Article Summary
To meet one’s near and distant financial goals, investors need to follow distinct approaches during different stages of life.
In early work life, it is crucial to identify various financial goals, estimate amounts needed and start regular investments.
Regular investment discipline can be established with the help of Systematic Investment Plans (SIP) from mutual funds.
At different life stages, lower risk investments can be earmarked for emergency and short term needs arising in the next 18-24 months.
Growth investments such as those in equity and equity-oriented funds can be earmarked for long term needs i.e., 8-10 years or more away.
3-4 years from any long term goals, gradually start shifting money from growth investments to low risk investments like debt funds.
With a wide range of investment options available, how does an investor make the right investments and stay on course to meet various needs? One way to do that is having a separate investment plan during each major stage of life. This will help choose the right investment schemes and best investment options.
Early Work Life - Building a Foundation (20s-30s)
Identify goals, start small
During this stage, expenses are in hot pursuit of income and regular savings are meagre. However time is on your side as the potential investment horizon is longer, and hence your risk appetite may also be higher. You may invest in equity to aim for higher growth over the long term. You also need to identify important future needs, like buying a car, marriage expenses and estimate the amounts required. To fulfil these goals, you can make regular investments through the Systematic Investment Plans (SIP) starting with amounts as small as Rs.500*.
Create an emergency fund
Such a fund is meant for emergencies and sudden requirements like relocation, job, or career transitions besides job loss. An amount equal to 3 months of expenses is typically required. This money can be gradually accumulated with SIPs in low risk, easily accessible, liquid funds.
Start with tax saving investments
Under Section 80C of Income Tax Act, 1961, you can avail annual tax deduction of up to Rs 1.5 lakh. They can combine tax deduction with market-linked investment through SIPs in Equity Linked Savings Scheme (ELSS), a tax saving equity fund. Like all equity funds, ELSS have the potential to provide high returns in the long term i.e., over 8-10 years or more. They are appropriate for long term needs like retirement that require substantial savings.
Settling Down: Balancing Growth and Security (40s)
Bigger family, bigger goals
On entering this phase of life, you need to modify your investment plan and accordingly seek the right investment schemes and best investment options. After marriage, your family gets bigger and you may have bigger goals like home ownership on the cards. Balancing EMIs with regular SIPs may help you close loans faster.
Children’s education
With higher education costs being substantially high and rising, kickstart SIPs from the child’s first year with separate portfolios for each child. For a start, you may consider SIPs in index and large-cap equity funds. Over time, consider adding higher risk mid cap, small cap, and flexi cap funds. You may also consider Solution-Oriented schemes like children’s career funds.
Invest towards your future
As you enter your 40s, your financial responsibilities may increase. This is the time to reassess your portfolio. A balanced approach with a mix of equity and debt mutual funds can help manage risk while still aiming for growth. Your existing investments can be supplemented with lump sums that accrue from time to time with the help of Systematic Transfer Plans (STP) facility. This involves lump sum being parked in a low risk, liquid funds, and regular investments in existing growth investments like equity funds. You also need to start investing towards your retirement if not done already.
Pre-Retirement: Consolidating Wealth (50s)
Goal-based investment
Specific goals like children’s education or home ownership may require more conservative investments. Debt mutual funds or hybrid funds can be added to the mix to provide stability and income. For other individual goals like mid-career course and joint financial goals like retirement, couples can research various investment schemes and arrive at the best investment options to firm up an investment plan for each financial goal. For instance, lower risk debt funds can be made for short term needs with higher risk, equity, and equity-oriented funds, for long term needs. Solution oriented funds like retirement schemes are also available to meet your post-retirement financial needs.
Pay hikes
With pay hikes, investors may consider increasing SIP amounts for existing investments. They could also opt for Top Up or Step Up SIPs where the regular investment amount is periodically increased, by a predetermined percentage, say 10%, annually.
Capital preservation
As retirement approaches, the focus shifts towards capital preservation. This can be done by regularly transferring money from equity investments to debt funds during this period.
Retirement: Ensuring a Comfortable Life (60s and beyond)
Income Generation
With active income ceasing, generating a steady income stream becomes crucial. Debt funds, especially those with a focus on government securities or corporate bonds, can offer regular interest income. For regular income from existing investments, mutual funds offer Systematic Withdrawal Plan (SWP) facility which regularly liquidates equivalent units.
Estate Planning Consideration
Estate planning is also important. Certain mutual funds offer systematic withdrawal plans (SWPs) that can be structured to manage inheritance.
Healthcare costs
Healthcare expenses can also escalate with age. Along with existing health insurance, building an additional healthcare corpus through investments in debt funds or fixed maturity plans can be a wise move.
Stay invested in growth investments
With ever increasing life expectancy, it is important for a part of retirement money, not immediately needed, to stay invested in growth investments such as equity funds and hybrid funds. This will help combat inflation during retirement and secure the standard of living.
Clearly, different stages of life require different approaches to investments not only to meet the needs prevailing at that stage but also future financial goals.
FAQs
1. Why do we need to alter investment approach at different stages of life?
Over time, especially after milestone events in life, such as marriage and birth of children, changes occur in the needs and goals. Major changes happen in the assets we need to accumulate. This includes liquid assets such as cash, savings bank account, and liquid funds for everyday expenses. Then, there are investments such as equity, equity-oriented funds for returns and hard assets such as car and home. Review and course change for investment approach helps investments align to meet needs of the current and subsequent life stages.
2. Are there needs that broadly remain unchanged over time?
The need for financial protection remains throughout life and needs to precede investments. In their absence, they can lead to premature use of investments. According to the needs of any life stage, financial protection can be maintained by having an appropriate amount of emergency fund and insurance protection for life, health, income, and assets such as car.
*This amount varies with different mutual fund schemes and asset management companies.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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