Well-known US-based independent investor Ralph Seger once said: “An investor without investment objectives is like a traveler without a destination.” He is right. One should invest only after identifying goals. Conventionally, investment planning used to focus on making money by investing in equity, debt, gold or real estate, and using the returns to meet needs as and when they arose. This is not prudent.

Goals and needs change across life stages. Also, financial market gyrations and inflation can put a lid on adequate returns and, resultantly, on the attainment of goals. One needs to have a holistic, goal-oriented approach to investing. Goals should be mapped to investors’ risk profile, income, expenses, age and financial responsibilities; and also to the time horizon and inflation. This approach inculcates discipline, encourages appropriate asset allocation and measures the progress of goals.

Asset allocation across life stages

Take a look at the asset allocation pattern for different goals. For instance, at a young age, investors can be aggressive and invest in equity. As age progresses, investors can diversify to debt and equity. On retirement, it is essential to switch to debt instruments to consolidate gains made from aggressive investments to lend stability to the investment plan.

Invest in mutual funds to meet goals across life stages

Managing one’s own investment portfolio requires skills, knowledge, regular tracking of market developments and rebalancing the portfolio. This can be arduous for investors. Professionally managed mutual funds are an apt alternative.

Systematic ways to attain goals

Investors can benefit from the systematic features of mutual funds – systematic investment plan (SIP), systematic transfer plan (STP) and systematic withdrawal plan (SWP).

SIPs – SIPs are akin to recurring bank deposits wherein investors invest a fixed sum of money at regular intervals. SIPs inculcate discipline, average the cost per unit and overcome the need to time the market. SIPs can be started at the beginning of a career to attain key financial milestones across life stages. For instance, monthly SIP of Rs 3,000 in an equity fund can help fund child’s education expense worth Rs 20 lakh after 15 years, assuming 15%[1] returns. One can also build a retirement kitty of Rs 5 crore by investing Rs 7,000 on a monthly basis in equity funds for 30 years, assuming the same rate of retirement.

STPs – Investors can systematically transfer a fixed amount from one scheme to another at regular intervals. STPs can be efficiently used as a tool to mitigate risks and protect wealth by systematically changing asset allocation by transferring from one asset class to another. For instance, STP is useful when one receives a lump sum from, say, sale of property, annual bonus or ancestral inheritance. Typically, such windfalls must not be invested in volatile asset classes such as equity as a lump sum, but must be invested progressively over longer periods. Such amounts can be parked in a liquid fund and transferred by STP to an equity fund.

SWPs – This feature is useful during the retirement stage as it allows withdrawal of fixed amounts of investments from mutual funds on a pre-determined frequency. Investors can also use it to meet planned and unplanned expenses across life stages such as school fees and utility bills. SWP in debt funds also offers tax efficiency compared with bank fixed deposits (FDs) and dividend options of mutual funds.  Interest from bank FDs attracts personal tax, and mutual fund dividends attract dividend distribution tax of 25% (excluding surcharge and cess). Dividend income is not fixed and is based on the fund house’s discretion. In case of SWP, tax is levied on the profit made on redeeming units and not on the principal amount. Further, over three years, investors stand to benefit more thanks to the indexation benefit.

Summing up

Investment planning should be in sync with goals across life stages and should not aim at only maximising returns.  A holistic approach results in better asset allocation. Mutual funds are a good tool to take care of your investment needs, but do proper due diligence before investing.

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