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The Responsible Householder

Mid-life investments can be complex, but the way out is by defining goals & keeping each goal separate…

Investment’s middle age is the most complex of all. Finances and savings are much easier to plan when there are a small number of clearly defined goals. When financial goals are added, each one seems to bring an exponential increase in the complexity of planning required. However, there’s a simple way of managing the complexity, which is to keep each goal distinct and target it in isolation from all others.

However, just setting goals is not enough. Each type of goal requires a different approach to investment. An investment that’s suitable for a big foreign holiday may not be the right one for child’s higher education. While that much may be obvious, what is harder to understand is that an investment that is suitable for a child’s higher education when it’s ten years in the future may not be suitable when the same is two years away.

It’s all very well to put money into equity funds for long-term savings, but at some point you will want to use the money and the long will become short. Eventually, the time to redeem your investment comes near and at that point, the money has to be redeemed. This is fine if the investment is in fixed-income assets, but with equity, this is a risky period. What if there’s a 2008 kind of a crisis (or even a routine bear phase) just before you redeem your investments? Imagine having your savings cut down by 20 or 30 per cent a few months before you actually need the money. To achieve your financial goals, exiting an investment is just as important as choosing one.

The need to exit investments means that at this stage of your life, fixed-income or hybrid investments will enter you portfolio. Therefore, the menu from which to choose investments:
Term Insurance with accident cover
Health cover
Hybrid Funds
Equity Funds

Preparing for Retirement
The battle for the preparation for retirement has to be fought on two fronts-a steady income and long-term protection against inflation. Some savers are lucky to have income streams like pension or rent that are reasonably inflation-linked. Others must divide their retirement targets into two parts: Estimate the regular income needed and start creating a source for it; and choose conservative equity options for long-term growth.

One little-noticed fact about the average Indian’s saving and investment pattern is that most of us are overloaded with debt anyway. Provident Fund as well as other savings instruments like PPF are entirely fixed-income and have no upside. For long stretches of time, these instruments actually underperform the inflation rate. Most Indians will realise that if they take a true 360-degree view of their asset base, the are heavy on fixed income and probably real estate. As one grows older, there’s a great deal of advice around that fixed income is better for those who are within five to ten years of retirement. This may be true, but remember, your statutory retirement options are 100%-debt anyway.