THE PER­FECT MIX

How to build a port­fo­lio to match your age, life­style and in­come

Business Today - - IMPACT SNIPPETS - By Naveen Ku­mar Il­lus­tra­tions by Raj Verma

How to build a port­fo­lio to match your age, life­style and in­come

A good in­vest­ment plan not only helps you achieve all your fi­nan­cial goals but also en­sures that your port­fo­lio is ad­justed to suit each phase of your life, tak­ing into ac­count your fam­ily struc­ture, in­come, life­style and risk ap­petite. That is why each fam­ily re­quires a unique fi­nan­cial plan and a cus­tomised port­fo­lio man­age­ment strat­egy. On the other hand, most of us pass through a sim­i­lar life cy­cle when it comes to manag­ing our fi­nance. Peo­ple gen­er­ally start earn­ing when they are in their 20s, re­tire in their 60s and move from one phase of life to an­other

af­ter ev­ery 10 years. There­fore, we will tell you how best to man­age your port­fo­lio in sync with your age group. But be­fore read­ing the rec­om­men­da­tions, you should get fa­mil­iar with the ground rules.

Why You Need Eq­uity In­vest­ment

Our chart ( Re­turns From Dif­fer­ent As­sets In The New Mil­len­nium) shows how eq­ui­ties have given a higher an­nual re­turn of 11.9 per cent over a pe­riod of 18 years com­pared to gold and fixed de­posits ( FDs). Dur­ing this pe­riod, gold has given an an­nual re­turn of 11.1 per cent. In fact, it is con­sid­ered a hedge against an as­set like eq­uity and should be used just as a hedg­ing tool. Your in­vest­ment in gold should ide­ally be lim­ited to 10 per cent of the port­fo­lio.

Con­sid­er­ing that the av­er­age an­nual re­tail in­fla­tion stood at 6.63 per cent over the past six years ( till De­cem­ber 2017), re­turns from FD at 7.88 per cent just moved around it. “In­fla­tion is the big­gest vil­lain when it comes to erod­ing the value of your money. But an in­vest­ment in eq­uity can com­bat in­fla­tion ef­fec­tively and give you real re­turns in the long term,” says Ku­mar. If you are plan­ning for long- term life goals, you should have higher ex­po­sure to eq­uity so that you can gen­er­ate su­pe­rior, in­fla­tion- beat­ing re­turns in the long term.

Why Goal-based Plan­ning

If you fail to align your in­vest­ments with spe­cific life goals, you may not be able to meet all of them in the long run. Such ran­dom ap­proach will also hin­der you from get­ting the big pic­ture – how well you are pro­gress­ing in pur­suit of your life goals. With­out clar­ity, it is highly likely that you will over­spend on a few goals and may not have enough funds for oth­ers. “The na­ture of in­vest­ment, its im­por­tance and the timeline dif­fer for each goal. The type of in­vest­ment plan­ning re­quired to send your child to univer­sity in 15 years will be dif­fer­ent from what is re­quired to pur­chase a car in three years,” says G. Pradeep Ku­mar, CEO of Mum­bai-based Union As­set Man­age­ment. There­fore, you should start in­vest­ing sep­a­rately for each ma­jor goal, which will also give you a sense of con­trol over your fi­nances. You can in­vest based on the time hori­zon of each goal. That way, if there is any course cor­rec­tion needed for one in­vest­ment, oth­ers will not be af­fected (check Ask­ing Rate Of In­vest­ment For Your Life Goals).

Grow Your Port­fo­lio In Sync With Life Stage

Take Off In Your 20s: In­vest­ment is the last thing on peo­ple’s mind when they start their first job. “Peer pres­sure lead­ing to higher spend­ing, ac­cess to easy credit re­sult­ing in over­lever­age, no clearly de­fined goals and a de­sire to earn quick money or im­pa­tient cap­i­tal are the top chal­lenges that we see in this age group,” ex­plains Vishal Dhawan, Founder and CEO of Mum­bai-head­quar­tered Plan Ahead Fi­nan­cial Plan­ners.

As most peo­ple in their early earn­ing phase rarely cre­ate any big as­set, it is bet­ter to start with smaller build­ing blocks – buy­ing fi­nan­cial pro­tec­tion plans such as life in­sur­ance and health in­sur­ance cov­ers, which cost the least at this age. “When you are in your late 20s or early 30s, in­vest in a term plan with a 35-40 year hori­zon, tak­ing ad­van­tage of the fact that the pre­mium will be locked in at a low rate for the en­tire pe­riod,” says Manish Jain, a cer­ti­fied fi­nan­cial plan­ner. If you are single, you must buy a health plan. In case you have de­pen­dent par­ents, you should also get term in­sur­ance. Else, you can wait till your mar­riage to buy your first term plan.

“In­fla­tion is the big­gest vil­lain when it comes to erod­ing the value of your money. But an in­vest­ment in eq­uity can com­bat in­fla­tion ef­fec­tively and give you real re­turns in the long term” G. Pradeep Ku­mar, CEO, Union As­set Man­age­ment

How­ever, if there is merit in big in­vest­ments early in your life, you should find a way to do it. “Spend­ing habits are formed very early on. Now that in­di­vid­u­als have con­trol on their money, good spend­ing and sav­ing habits formed at this stage will be of great value,” says Dhawan of Plan Ahead. “By in­vest­ing early, they can lever­age the power of com­pound­ing and go through the ups and downs of fi­nan­cial mar­kets in a far more san­guine man­ner due to their abil­ity to hold longer term if there is no ( im­me­di­ate) need for the money.”

Long in­vest­ment hori­zon also in­creases risk ap­petite and you can opt for 75- 90 per cent in­vest­ment in eq­ui­ties. “If there is no de­pen­dency or li­a­bil­i­ties, peo­ple could be sig­nif­i­cantly over­weight on growth as­sets like eq­ui­ties through di­ver­si­fied port­fo­lios of mu­tual funds (MFs) and ex­change-traded funds (ETFs). They can go for small ex­po­sures to fixed in­comes for emer­gency/ con­tin­gency goals,” points out Dhawan. How­ever, it is bet­ter to opt for sys­tem­atic in­vest­ment plans, or SIPs, and get fa­mil­iar with reg­u­lar sav­ing and eq­uity in­vest­ment. To meet short- to- medium- term goals with a time frame up to three years, you can keep around 10- 20 per cent of your in­vest­ment in FDs and the rest in debt/ liq­uid mu­tual funds.

Grow Ag­gres­sively In The 30s: It is that phase of life when you have mar­ried and started a fam­ily. In the ab­sence of sig­nif­i­cant as­sets to fall back on, the need for fi­nan­cial pro­tec­tion re­mains high. “This is when fam­ily life starts and re­spon­si­bil­i­ties in­crease. So, both life and health cov­ers should be in place by the time you en­ter the 30s. By the time you are in your late 30s, you should have an ad­e­quate life in­sur­ance cover ( in case the ini­tial amount is not enough). More­over, each spouse should have a sep­a­rate life and health cover,” says Jain.

When it comes to in­vest­ment, peo­ple could face nu­mer­ous chal­lenges. “In­stead of one cra­dle- to- grave job pro­file that char­ac­terised ear­lier gen­er­a­tions, to­day’s jobs come with risks of shorter ten­ure, tech­no­log­i­cal changes and sig­nif­i­cantly higher stress lev­els. Such an en­vi­ron­ment makes it all the more nec­es­sary to adopt a pru­dent sav­ings strat­egy in the 30s,” says Ajay Bodke, CEO and Chief Port­fo­lio Man­ager, Port­fo­lio Man­age­ment Ser­vices, at Mum­bai-based Prab­hu­das Lil­lad­her.

With nearly 30 years of earn­ing life left, peo­ple can in­vest ag­gres­sively and go for around 75 per cent eq­uity ex­po­sure. “In­di­vid­u­als should first start a SIP fo­cussed on eq­ui­ties, a mix of higher risk mid/small- cap- ori­ented well-man­aged port­fo­lios com­bined with some al­lo­ca­tion to a lower- risk, blue- chip eq­uity port­fo­lio,” adds the Prab­hu­das Lil­lad­her CEO.

As in­come rises, tax man­age­ment also be­comes cru­cial. “In­vest­ment in a res­i­den­tial mort­gage will en­able one to get gen­er­ous tax breaks both on in­ter­est and prin­ci­pal re­pay­ments. In ad­di­tion to eq­uity

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