Investing Across Life Stages: Strategies For Every Phase Of Life

The total market capitalisation of India's stock market has reached about $5 trillion, which reflects rising investor confidence in the country's long-term economic growth prospects¹. The below graph represents the growth of the total number of Demat accounts in India during the last 14 years and the number of Demat accounts added each year. This clearly shows that the investment behaviour of Indians is changing and they are moving towards volatile assets like equity and mutual funds from traditional investments like fixed deposits.

Considering the rising trend towards volatile assets, it is important to understand where to invest during different stages of your life. Your financial goals and investment strategies at different stages of life must complement your current needs and future goals. With the continuously changing landscape of investments in India, you will get new opportunities and challenges. In this blog, we will explore how to invest money for every life phase to meet your goals and tackle challenges.

Why Should I Invest?

The way you invest money forms the bedrock of financial freedom. A diversified investment portfolio is important for the following reasons:

• Wealth building through compounding
• Risk diversification
• Goal fulfilment (short-term and long-term)
• Inflation security
• Financial security

Factors Affecting How We Invest

A one-size-fits-all approach never works because every person's financial needs are different. Choosing the right investment is a personal decision. Let's explore the key factors that impact this decision:

1. Income and Stability - If your income is not so predictable, you may prefer safer investments. On the contrary, if your earnings are stable, then you may tolerate more risks for better returns.
2. Expenses - At each step in your life, when the costs are high, it limits you from investing, while lower expenses give flexibility. 
3. Responsibilities - You're usually lighter into financial commitments when you are single. But the moment you start taking on greater responsibilities, such as supporting a family or planning for retirement, your investment strategy must be revised to meet those new needs.
4. Age - The younger you are, the more time you have to recover in case of market downturns; hence, you can afford to take bigger risks. 
5. Market Dynamics - Whatever your need, the state of the market — whether in a boom or in a downturn — will guide you in where and how you invest.

How To Invest At Different Stages In Life?

Your investment strategy must evolve with each stage of your life. Let's explore how your decisions must change based on where you are in life. Here we will cover three important aspects of investments - financial goals, risk tolerance and investment strategy which change with different phases of your life.

According to a survey conducted by ET Money in 2022, it was found that Indian investors have higher risk tolerance as they are now moving from traditional investments like fixed deposits to risky assets like equity, mutual funds and alternative investments². Hence, it is important that while investing you take calculated risks. During your early life you can take higher risks, however during your 40s and 50s you will think of moving towards safer options.

1. Early Career 20 & 30s: Building the Foundation

You can start investing right after you receive your first paycheck. Allocate a portion of your income to savings and investments. During your 20s and 30s, you should focus on the following investment goals:

• Financial Goals

Focus on creating an emergency fund and investing in equity for growth. High-growth investments give the opportunity to accumulate wealth. 

• Risk Tolerance

Since time is on your side, you can afford to take more risks and benefit from compounding. You should be aware of your risk appetite and plan your investments accordingly.

• Investment Strategy

Start with equity-based investments and choose SIP mutual funds to invest in. While you can invest directly in stocks in growth sectors like technology and consumer goods, equity mutual funds like Axis Bluechip Fund or Mirae Asset Large Cap Fund offer diversification along with long-term growth. In case you want to start investing with a small amount, apart from Mutual Funds, investment-grade corporate bonds are also great avenues for fixed-income investing where you can start with an amount as low as INR 1000.

For example, if you start investing INR 5000 every month in a high-growth mutual fund earning an average annual return of 12%, by the time you turn 50, you could amass close to INR 80 lakhs.

2. Mid-Career 40s & 50s: Growth With A Dose Of Caution

At this stage of life, you will probably have a spouse and children to care for.

• Financial Goals

You must balance between growing wealth and managing risk by mid-career. Save for retirement while meeting key financial obligations like education and mortgage payments. 

• Risk Tolerance

At this stage, moderate risk tolerance is appropriate, with 50% to 60% in equities to enjoy growth and the remaining in debt funds and bonds for stability. 

• Investment Strategy

Diversify with a mix of equities, bonds, and balanced funds. Hybrid funds like ICICI Prudential Equity & Debt Fund or HDFC Balanced Advantage Fund are also popular options. Increase investments in pension schemes like the National Pension Scheme (NPS)  and provident funds like the Employee’s Provident Fund (EPF) to plan well for old age.

For example, a 45-year-old investing INR 20 lakhs in a diversified portfolio with an asset allocation of 60% equity and 40% debt can realistically expect balanced growth of about 9% per annum, thus managing risk and aiming for growth.

3. Pre-Retirement Years-50s & 60s: Transitioning To Income

Your children would have grown up by now, and your mortgages and loans would have gone down. Now, begin an early transition to income generation with a higher allocation toward relatively safer classes of investments.

• Financial Goals

The focus must now shift to capital preservation and stable income sources to meet your post-retirement financial needs. 

• Risk Tolerance

Lower risk tolerance is right for this stage. Safe investments with predictable returns are more favourable as they offer capital preservation. A small portion of equity will help you keep up with inflation.

• Investment Strategy

Low-risk and fixed-come investments like government bonds, fixed deposits, and Senior Citizen Savings Scheme (SCSS) offer stable income. Annuity plans from LIC are also popular options. Health insurance and planning for long-term care further enhance the degree of coverage.

For example, an investment of INR 30 lakhs in government bonds and fixed deposits at 7% per annum can result in regular income with capital preservation.

4. Retirement Phase (60s & Beyond): Living Off Your Portfolio

These are the golden years when you reap the benefits of your disciplined and consistent investments. 

Even without a salary income, you can continue to stay invested.

• Financial Goals

A steady income stream with capital preservation is the main focus. Your investment portfolio must be mature enough to cover your medical and lifestyle expenses.

• Risk Tolerance

Very low-risk tolerance is right for the post-retirement phase of your life.

• Investment Strategy

Estate planning will become important for transferring wealth to heirs. Senior Citizen Savings Scheme (SCSS), Post Office Monthly Income Schemes (POMS), and bank fixed deposits are popular choices for seniors in India. Ensure that you also allocate a small portion for inflation hedging in dividend-paying stocks or gold ETFs. 

For instance, an investment of INR 50 lakhs between SCSS and annuities yielding 8% per annum will fetch a regular monthly income of about INR 33,000 per month with moderate certainty.

Conclusion: Building A Wealth Portfolio Is A Journey

Creating wealth for early and peaceful retirement is a journey that needs discipline and consistency. At the early stage of your career, lay the foundation for growth with high-risk, high-reward options and balance risk and stability during your mid-career phase. As you age, your investment allocation should progressively move towards safer and low-risk investments. Revisit your portfolio from time to time to capture market trends and realign investments with evolving needs.

Start early and get expert advice on where to invest money to get good returns and build a diversified portfolio for each stage of your life.

References:

1. JP Morgan, Accessed from: https://www.jpmorgan.com/insights/global-research/markets/india-stock-market-outlook
2. ET Money, Accessed from: India Investor Personality Report 2022: Insights On Investor Behaviour

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