Whatever Your Age, There’s A Mutual Fund Strategy For You

Adhil Shetty

Mutual Funds are an effective investment mode for wealth creation. Such investments can be made by any investor regardless of their age. However, the strategy for investment in Mutual Funds at differs with age as risk profiles and goals of investors change.

Here is a simple guide to invest in mutual funds for different age groups. However, all investors need to be disciplined, regular, and patient with their investments to fulfil their goals.

Investors in their 30s

Investors who fall in this age bracket have a dominant factor in their favour: time. Along with it their risk taking capability or risk appetite is the highest among all age groups. First and foremost, these young investors must outline their financial goals ranging from marriages to children education, from buying a house or a car to retirement planning. Since, there are a whole lot of goals at this stage, investors need to plan their finances well to achieve them.

Equity investment has to be the priority for investors in their 30s. Going by the thumb rule, they should put in 70% (100 – Age) of their savings meant for investments in equity schemes of mutual funds. However, there is no harm if they put in 100% of their investible surplus in equity schemes at this stage. Ideally, one should not have more than 5-6 schemes in the portfolio. You should select good schemes from categories of diversified equity fund, large-cap fund, a small-cap or mid-cap fund, a tax saving equity scheme and one or two sectoral equity funds. Allocate amount in all these through systematic investment plan (SIP) and stay disciplined in your payment going forward. If possible, use the top up feature of 5-10% so that as your salary grows, your SIP amount also keeps rising year-on-year. Remember: your risk profile may change after a decade, you may have to re-look at your portfolio then and make necessary changes.

Investors in their 40s

The age of 40 or more dynamically changes your risk appetite. You are in the mid of your professional career and can’t afford to make bad investments. Your kids soon will be hitting teenage or reaching adulthood. Mutual Funds come as a great help at this juncture. However, at this stage, your exposure to equity schemes of MFs should be squeezed down to 60 per cent and for the rest 40 per cent you should bring in hybrid funds or popularly known as balanced funds which give you an allocation to debt as well as equity. You can re-look at your existing MF schemes and can replace a sectoral fund and a mid or small-cap fund with a balanced fund. You must carry on with a diversified equity fund, a tax saving fund and a sectoral fund even in your 40s. This adds up the much needed growth in your portfolio. From here on, asset allocation becomes a key. One should not be putting all eggs in one basket. Time calls for a diversification amid mutual fund investments. This way, your portfolio looks much balanced and does not tilt hugely towards one particular asset class – be it equity or debt.

Investors in their 50s

This is quite a critical stage in anybody’s life. With risk taking ability significantly reducing on one hand, you are relieved of the fact that several of your life goals like children’s higher education, even their marriages, buying a car or a house may have been achieved. Now the focus should shift to your retirement plan. As you still have around 10 years to build your gold nest, you should tread safely with your investments. Get ready to make quite a few changes in your MF investment portfolio strategy. Invest only 40-50 per cent of your savings meant for investment in equity oriented schemes – diversified equity fund, a large cap fund and a tax saving fund. Say no to sectoral funds or mid and small-cap funds if they don’t suit your risk appetite. The balance 50-60 per cent of funds meant for investments should be more debt-oriented. You can carry on with 20 per cent to hybrid funds but rest should be put in pure debt products like income funds, liquid funds and gilt Funds (primarily invest in government securities). Such an allocation will save you from any sudden shock if market cracks and you can safely attain your retirement without much of a problem.

Investors in their 60s

Now, you are no more earning a regular monthly income by way of salary. However, you have at least 10-20 years to live post your retirement. And your risk appetite has nearly bottomed out. Your MF investment needs to be overhauled. Remember, asset allocations remains the key. Prefer allocation with one-time investments in all the categories. For this, you can use the wealth generated so far during your working career. Cut down your equity exposure in Mutual Funds to 10-20 per cent depending on your risk profile. But choose only a large-cap fund with moderate or low risk attached. For tax rebate you can have a tax saving mutual fund scheme as well. The rest should be put in a mix of hybrid (20%) and debt funds (60%). You can even choose to stop your existing SIP in all or selected funds – mainly equity schemes. It’s wise not to carry on with any monthly commitment of paying for your investments. These are times when you should use the feature of Systematic Withdrawal Plan (SWP) if you need money for running your monthly expenses post retirement. The fund houses will pay you a fixed sum every month depending on how much you need while the rest of the investment keeps growing.

The writer is CEO, BankBazaar.com