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