“An investment portfolio is like music, it changes with age.”

There is a dominant genre for every decade, before 2000 there was rock, between 2000 and 2010, pop dominated the charts, and after 2010 it has mostly been hip hop and electronic music, and so on. Similarly, an investment portfolio should change with age to reflect the changing risk appetite and financial goals. Creation of wealth takes a long time when investments are done with proper planning and discipline.

Financial goals should be very clear before starting with asset allocation. For example:

  • Some people want to build their dream home,
  • Some want to have enough to send their children to a foreign university, while
  • Some just want to retire comfortably.

Investment portfolios differ with financial goals as well as the timelines to achieve them. If you want to generate a hefty amount in a relatively short span the risk will naturally increase. There are three main categories of assets

  1. Equity - Market Linked assets or assets with high risk
  2. Debt - Guaranteed return giving assets or assets with low risk
  3. Cash (Liquid funds)

Before looking at the age wise allocation of assets it is important to understand the a few important thumb rules:

The Thumb Rule
  • The thumb rule of asset allocation is to subtract your age from 100 and the balance should be allocated to equity. For example, if you are 70, equity exposure should be 30 per cent.
  • You must invest only that much money in equity that, in the event of a loss, you can survive till its long-term recovery.

Let us take a look at changing the proportion of assets according to age.

Between Age 20 and 30

When you are young, you have your entire life before you to invest.

  • In your 20s you should allot a bulk of your resources to high-return high-risk assets.
  • The proportion of equity in your investment portfolio should be highest in your 20s and 30s.
  • When the investment amount is small, an investor can tolerate market volatility and losses.
  • In the long run, equity tends to give the highest returns but in the short term market movements can be unnerving.

For instance, if ₹ 3, 00,000 are invested in equities and the market declines by 30%, the temporary loss can be digested when you are in the 20s. Because you have less dependency on your income - but if the amount is ₹ 2 million and you are in the 40s, it could be disturbing - because then you have more dependency on your income.

The investment portfolio in the decade between 20 and 30 should have:

  • 80% allocation to equities,
  • 15% to government supported savings schemes like EPF or PPF, and
  • 5% should be held as cash

Between Age 30 and 40

Depending on your financial goals the portfolio should be readjusted in your 30s.

  • If you have a high-risk appetite, the proportion of equities can be maintained around 60-70 per cent. In a different scenario, if you want to limit the risk associated with equity markets, investing in ULIPs could be considered. Investments in a good Unit Linked Insurance Plan or Savings plan can generate steady returns with relatively lower risks. ULIPs offer various tax benefits too!
  • You can also consider investing in real estate for a home or to generate rental income. Taking a home loan can also help you attract tax benefits.
  • Having a term life insurance policy is a must. In your absence any loans or other financial responsibilities will be taken care.
  • Investments in the government-backed guaranteed savings plans should be continued. For instance, saving in guaranteed plans can give you guaranteed returns to fulfil small financial goals.
  • If you have not taken health insurance, then this is the right time to take one, as with increasing age the premiums will also inch upwards.
Pro Tip

Diversification of portfolio is a must. Do not invest your money in one place. Invest your money in different instruments based on your risk appetite.

Between 40 and 50

When you hit 40, the trade-off between lifestyle expenses and savings should aggressively tilt towards SAVINGS.

  • People tend to earn the most in the prime of their work life. While investing in the 40s, more preference should be given to lower risk bonds and fixed investments. Although the ratio of equity and bond investment will vary depending on the risk profile.
  • Investments in income-generating savings can be a good option.
  • An effort should be made to have a balanced portfolio - that is - having 40% equity and 40% debt funds.
  • If you have not taken an insurance cover, it is the best time to secure your family’s future through a good life insurance policy.
  • Around 5% should be kept as emergency cash.
  • Around 5% should always be maintained to take advantage of new opportunities.

Between 50 and 60

In the last decade of work, you need to analyse the success of your past investments before reallocating resources.

  • The present and desired lifestyle and future goals need to be kept in mind.
  • As you move towards 60 you need to cut back on your equity exposure.
  • An effort should be made to create an alternative income stream from your investments, like ploughing some money into higher dividend paying equity and bond funds.
  • If you plan to keep working for some additional years, you can continue with 60 per cent stock and 40 per cent bond exposure.

Between 60 and 70

At this stage, asset allocation will entirely depend on the progress you have made towards your financial goals.

  • Once you are over 60, it is best time to re-invest your returns into an annuity plan. The investments in the plan qualify for deduction under Section 80C of the Income Tax Act, 1961, and it offers one of the highest interest rates among all small savings schemes.

Whatever steps you take, try to focus on the bigger picture. All in all, choose wisely and think before you put your money anywhere. Create a good plan that is derived post consideration of your goals, risk appetite and expenses. Finally, evaluate your financial strategy, at least once a year– you won’t regret it.

The earlier you begin, the better, as over time your investments will compound and the magic of compounding will work wonders to create a wealth kingdom for you. Explore a variety of savings and investment choices, and get in touch with our reliable financial advisor now!