Investing through life’s stages: Know the basics

Investment decisions are very personal and unique to each individual. But there are some basic rules that apply to everyone at different stages of life for building a corpus and steady income after retirement, says A L I Chougule

Age, as the saying goes, is just a number. While ageing is an integral part of life, the number also matters because priorities of life change as you age. Since needs and requirements of a person change with advancing age, the requirement of money also changes. This change has a co-relation with investment strategy and risk appetite.

It goes without saying that the end objective of any investment is to create a corpus for steady income after retirement to meet all necessary expenses as well as to live without compromising on lifestyle that you have lived in your working life. So what are the different investment strategies at different stages of life?

Let’s consider four important stages of life: youth, marriage, parenthood and retirement. When you are young and single, you are not burdened by responsibilities and financial dependents. Since age is on your side you can save as much you want and can also afford to take risk. But when you get married your responsibilities increase, so also the expenses. At this stage of life not only you will need liquid funds but your risk appetite also goes down a bit.

When you become parent, you have more financial dependents. Hence, not only your expenses increase, but your savings also take a hit and your risk appetite decreases even more. And finally when you retire, you reap the rewards of investment but you are more cautious with money and become risk-averse.

Therefore, at each stage of your life, not only you need a different investment strategy but the factors that will influence your strategy include age, risk capacity and investment amount. As you become risk averse with advancing age, your investment amount will also decrease. Therefore as you age, your investment strategy will change and so will the investment instruments in your portfolio. For instance, a bachelor’s portfolio will be markedly different from that of a middle-aged person. Similarly, a retired person’s portfolio will be vastly different from that of a person who has just started his married life. In other words, the portfolio of a 30-year-old will be vastly different from that of a person who is in his 40s or 50s.

Investing, according to investment advisors, is a lifelong process. Though it is never too late to begin, it is always better to start early, so that you are better off in the long run. Remember that life is not a sprint, but a marathon. Therefore, it’s best to start saving and investing as soon as you start earning.

It will teach you discipline and the skills you acquire will benefit you for the rest of your life. Disciplined saving is the major part of a successful lifelong investment strategy as it will help build a cash reserve. The next step is to prepare an investment plan which will depend on your age, the amount you want to invest and tolerance to price fluctuations or risk appetite. Therefore, age, amount and risk capacity will determine the investment instruments in your portfolio.

Investors can be divided into three broad categories: the young investor (25 to 35 years), the middle age investor (36 to 50) and the senior investor (50 and above).

An investor in his mid-20s and early 30s – it is called the ‘golden age’ of investment – has years of investing ahead of him. As the time horizon is longer, the investor can afford to take risk to build a portfolio which, if does not meet the desired goal, can be refreshed to build a substantial corpus over a longer period. Investors in this age group, besides subscribing to traditional investment products like a term plan, PPF and may be debt instruments should consider investing in equity-linked mutual funds, preferably diversified open-ended growth schemes.

If the disposable income is higher, investors can opt for two or three schemes to have a diverse portfolio. The advantage of investing in mutual funds is that your money is in safe hands of fund managers who understand the vagaries of equity market.  However, if you can figure out the fundamentals of stock market investment and can identify good investment opportunities, preferably multi-year hold stocks, you can directly invest in equities yourself. But keep your time horizon longer.

If the young investor can invest up to 60 per cent of his income, the middle age investor is advised to invest not more than 30 to 40 per cent, though the latter earns more than the former. That’s because marriage and parenthood bring about greater responsibility and more expenses like home EMI, child education, health insurance and emergency funds. As investors in this age group are moderately risk averse, they tend to be more cautious with their investments and hence should prefer a balanced portfolio.

Opting for a term plan, covering the home loan amount, is strongly recommended. Debt funds and equity growth funds are safer options for middle age investors. Investment advisors also recommend index funds, if you can tolerate price fluctuations, and balanced funds to cushion the market volatility. Long term investment in equities, preferably multi-baggers, can also be a rewarding option in this age group.

The senior investors’ club enjoys high income but don’t enjoy the advantage of time horizon as they have a decade or less left before retirement. In this age group the risk appetite is very low. Hence investment advisors often recommend debt funds and equity-linked saving schemes which come with the advantage of tax benefits under 80C. Those who are above 60 and beyond can keep a portion of their corpus in bank fixed deposits, senior citizens saving scheme and monthly income plans. Equity-linked debt funds can also be considered for inflation-adjusted returns and tax benefits.

To live happily as well as to maintain consistency in living standards and lifestyle, the three basic disciplines are: planning your goal, investing wisely and monitoring your investments regularly. How you do it depends a lot on your life stage and approach to financial management.

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