Our financial needs and investment goals change in accordance with our age. It is important that your investments reflect this risk profile. You may start out in the vigour and adventure of youth, where you have an enormous appetite for risks and retirement is decades away. Therefore, investing for the golden years is a long-term goal and you can afford greater risk if there’s even a remote possibility of higher returns. You may ride on the highs and the lows of the market for a while. You may also want to serve short-term goals in the meantime – funding your education, financing a vehicle and the like. Gradually you are bound to become risk-averse and make investments in less volatile spaces where the returns are assured, even if lower than the risky alternatives.
It is important for you to understand your risk profile before building an investment portfolio. Your risk profile typically depends on your age, life goals and the duration for which you can/want to make the investment.
To determine the investment solution that will meet your goals, you have to identify the level of risk you are comfortable operating at. Remember the thumb rule is that the higher the risk, the higher the return. You could have the willingness for:
- Conservative or low risk, where you prefer stable investment and focus less on capital growth. Such Investments are predictable, grow gradually in value, are characteristically less volatile. If this suits you, you would go for a mutual fund investment available at Finserv MARKETS, and choose a debt-oriented pool.
- Balanced or medium risk, when your appetite allows you to enjoy a measure of volatility, and thus the possibility of higher return. Since you are averse to uninhibited risk still, you might opt for a balanced mutual fund investment in both equity and debt.
- Dynamic (high risk), if you don’t mind exposing yourself to very high risk and volatility. This means you are ready to take a risk if that means it gives a chance to maximize capital growth. You would prefer heavily equity-oriented mutual fund investments in such case.
Let’s now break down how investment and risk profile changes with age:
When they say that your 20s are for experimentation, taking risks and learning lessons, it also applies to your financial decisions. It is the starting point of your career, so most of your money is spent on socializing, indulging in a fancy lifestyle, and probably repaying your education loans. During this period, your return expectations are high because you are ready to carry more risk. You shouldn’t care about liquidity, because you don’t plan on undertaking enormous expenses. The goals which require some sort of financial allocation are often limited to education, holidays, vehicle and perhaps marriage. What to chase? You have a very aggressive risk appetite, so choose majority investments (a ballpark figure of 75%) in equity instruments, and split the rest between debt and cash. Equity-focused mutual funds are a good fit. Consider purchasing them from Finserv MARKETS, which gives you a wide variety of funds to choose from. Benefits from buying online on Finserv MARKETS include zero commissions, detailed portfolio insights and a high degree of transparency overall.
During this phase, for most of us, the career is on track, so you focus on meeting other key financial goals of life. Buying a house is a big one here. You carry a reasonably aggressive risk appetite. As your risk profile grows less aggressive, choose to lower your investment in equity-oriented funds and shift them to more debt instruments that have stable returns. Additionally, you should also consider planning for retirement during this period (even though you can start earlier) so that you have enough years to make provisions without breaking your back, financially speaking. Insurance is another investment you should begin at this stage, since medical costs could prove to be a burden in the next stage of life without planning.
Your 40s are usually the time you hit the peak with regard to your salary. Thus, with a medium risk appetite, you could go for a moderately aggressive risk profile with around 40% equity investment, and the rest are inclined towards liquidity. You need to provide for filial responsibilities, mostly taking care of dependants, whether your parents or kids. At this point, you may want to consider investing more in debt-focused mutual funds. Finserv MARKETS hosts a range of hybrid and debt-focused mutual funds that can help you recalibrate your risk profile to your age.
In this pre-retirement low-risk stage, you need a balanced approach towards all kinds of investments. Therefore, roughly equal parts investments in mutual funds and debt funds are the way to go, while keeping your liquidity preferences prioritised above all at around 40-45% of your financial standing.
Post-retirement, you likely don’t receive any regular income, apart from the incoming returns you get from your retirement corpus such as Bajaj Allianz retirement ULIP you bought from Finserv MARKETS. This helps maintain a satisfactory lifestyle and meet exigencies. At a very risk low profile, your liquidity needs reign supreme.
Proper investment planning, in accordance with your risk-return profile and investment horizon, is the key to achieving financial goals. It is also imperative that you start early to be able to achieve your investment goals. Make informed decisions by matching your goals at various ages with corresponding risk profiles. One final tip: review your risk profile from time to time, as your goals are constantly changing too; and accordingly match your investments with this changing risk profile.
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