Funda Of Investing In Mutual Funds At Different Life Stages

Every life stage has a different need and requirement, and your investment strategy must be designed according to it. DSIJ explains the different life stages and how to invest in these stages.



It is rightly said that an investment not backed by a goal is like traveller with no destination. It is always advisable to invest with proper goals in place. Traditionally, investments in equity, debt, gold or real estate used to be done just to make extra money and were not linked to any goals. Such an approach may create an unexpected cash-flow mismatch and you many not actually have the liquidity when you require it the most. 

There may be different goals at different life stages. There are generally three major life stages, viz. early career, middle age or pre-retirement and retirement. Financial goals also differ in these life stages. 

Managing investment by your own is a very tough job as you require specialised skills, knowledge, regular tracking on what's going on in the market, what is happening to your portfolio, rebalancing your portfolio and so on. This activity involves lot of efforts and time. Therefore, you need a professional that can manage portfolio on your behalf. Mutual funds are one of the avenues that you can use for your investment purpose. Mutual funds offer a wide gamut of products to suit your requirements.

Early career
In this life stage, people have no responsibilities as such, there may be some responsibilities, but most of them have just started working or have spent certain number of years in their respective careers. At this stage, the likely goals are buying the first bike or a car, buy the first house, or go for a vacation, etc.

It is natural to have such kind of goals, but as one may have just started earning, it is advisable to first build a contingency fund, also known as emergency fund, which would help to save you against any future loss of income for a minimum period of three to six months. Thereafter, you can look for your first house and first car, then for retirement and then for any other goals. Mutual funds can help you with this. For contingency fund, invest in liquid or ultra-short term mutual funds, for house and car, it depends on when you wish to acquire the same, and for retirement, you may have a right mix of equity and debt mutual funds. Remember, before investing in a mutual fund, kindly get your risk profile accessed.

Ex: Let us assume that you are in your early life stage and wish to buy a car worth Rs5 lakhs in 3 years and if we take inflation of 5% into consideration then the same amount required after 3 years becomes Rs5.79 lakhs. Then to achieve this you would either need to do lumpsum investment of Rs4.25 lakhs or you may also opt for SIP of Rs13,700 per month for 3 years. For arriving at the lumpsum and SIP amount it is assumed the rate of return is 11 per cent and equity and debt allocation is 80% and 20% respectively.

Middle age or pre-retirement
In this life stage, the person is married and may also have children. Here, the priorities change altogether and even the goals. Now, more priority is given to children, so the goals are altered accordingly. In this life stage, there may be various goals such as children's education and marriage, vacation, upgrading cars, upgrading gadgets or buying new one and so on. It is prudent to first prioritize the goals as children's education and marriage, along with retirement and then the other goals. Mutual funds may help you to achieve these goals with wide range of equity and debt mutual funds. The investment in mutual funds and category of mutual fund for different goals would depend on the investment time horizon and the certainty with which these must be achieved.

Ex: Let us assume that you are in your middle age or preretirement life stage and wish to fund for your child’s graduation which may cost you around Rs15 lakhs, which after taking into consideration inflation of 10% comes to around 38.9 lakhs and you require this amount after 10 years. Then to achieve this you would either need to do lumpsum investment of Rs14.8 lakhs or you may also opt for SIP of Rs19,300 per month for 10 years. For arriving at the lumpsum and SIP amount it is assumed the rate of return is 10 per cent and equity and debt allocation is 60% and 40% respectively.

Retirement
This is the slowdown period or, you can say, a period where one can relax and pursue one's hobbies. Here, the goals again change as, in this life-stage, you would be done with all the major responsibilities and liabilities. The main focus though would be on regular income, health corpus and inheritance. But, apart from these goals, there can be many goals such as vacation, charity, wealth creation and so on. Here also, mutual funds can help you achieve your goals. But as this is the retirement period where there is less or no income, one cannot risk it with having large exposure to equities. One can have at least 25 per cent exposure to equities to keep up and beat the inflation. So,a major part of the investments should be in debt mutual funds. The investment proportions may vary, based on one’s assessed risk profile.

Ex: Let us assume that you are retired and wish to go for a world tour which is costing you around Rs20 lakhs, which after taking into consideration inflation of 7% becomes around 39.3 lakhs and you require this amount after 10 years. Then to achieve this you would either need to do lumpsum investment of Rs16.6 lakhs or you may also opt for SIP of Rs20,600 per month for 10 years. For arriving at the lumpsum and SIP amount it is assumed the rate of return is 9 per cent and equity and debt allocation is 30% and 70% respectively.

There are three major tools which may make your mutual funds investment more hassle-free. These are SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan) and STP (Systematic Transfer Plan). Let us see how these can prove beneficial in different life stages.

SIP (Systematic Investment Plan) : SIP or Systematic Investment Plan is investing a fixed sum of money at regular intervals. SIP is one of the best ways to invest in mutual funds. SIP comes with the benefit of rupee cost averaging, which means you will buy more units at lower NAV (Net Asset Value) and fewer units at higher NAV. This is suitable for all the three major life stages, but it would be more useful in early career and middle age or pre-retirement life stage and also these stages act as accumulation phase for retirement.

SWP (Systematic Withdrawal Plan) : SWP or Systematic Withdrawal Plan is the opposite of SIP. In SIP, one is investing at regular intervals, but in SWP one is withdrawing at regular intervals. This allows you to withdraw a fixed sum of money at regular intervals. This helps an investor to earn on the remaining investment, which is not withdrawn and only the withdrawn amount would be coming under the purview of the income tax. This is more suitable for retirement life stage, where one needs a regular fixed income at specified intervals. So, in the case of retirement goal, investment via SIP in the accumulation phase, i.e. early career and middle-age life stage and SWP in the distribution phase, i.e. retirement life stage is the perfect combination.

STP (Systematic Transfer Plan) : STP or Systematic Transfer Plan is similar to that of SIP, but the difference is that in STP a fixed sum is transferred from one fund to another at regular intervals. This tool becomes useful in many cases. Suppose you have started an SIP in ELSS (EquityLinked Savings Scheme) which has a lock-in period of 3 years, i.e. each SIP of yours in ELSS would be locked in for 3 years. Now, here you may after completion of three years of first SIP, you may start STP in any other fund as required. This way, you won’t have to wait till the entire SIP completes three years or keep a track of SIPs completing three years. Remember, since STP is considered as redemption or realisation, it comes under the tax purview.