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Life Stage Funds

These funds maintain an asset allocation suited to investors of a particular age group and keep on re-balancing their asset allocation after fixed intervals of time to maintain the defined allocation

The correct asset allocation and timely portfolio re-balancing are two of the key ingredients of a successful investing strategy. Asset allocation refers to investing money across equity and debt securities to suit one's needs and time horizon.

For a mutual fund investor it would involve selecting the right combination of equity, balanced and debt funds. Portfolio re-balancing means buying or selling the funds in one's portfolio so as to restore the proportion of different assets classes. This may sound straightforward, but is easier said than done. Most investors do not decide upon their asset allocation before investing. Even if some do, they are guilty of not re-balancing the proportion of various asset classes which may get disturbed with time. There are two problems in this. Firstly, re-balancing is a repetitive task and most of the investors do not devote that much of time to it. Secondly, by definition, rebalancing means selling off the asset class that has been doing well recently and is thus a hard thing to do. For example, after a tremendous run-up in the stock markets, the proportion of equities in one's portfolio may go up significantly and call for a re-balancing by selling some of the equity holdings while adding debt. But the lure of extracting more out of equities often keeps the investor from taking a timely action. To add to this, there are tax considerations that are to be considered which an individual investor can't often ignore.

The Concept Life stage funds are basically fund of funds, which maintain an asset allocation suited to investors of a particular age group and keep on re-balancing their asset allocation after fixed intervals of time to maintain the defined allocation. Hence, they offer a readymade answer to an investor's re-balancing needs. For example, a life stage fund for an investors in his 40s currently will allocate say 35 per cent of assets to equity oriented schemes and 65 per cent to debt oriented ones.

If the equity market go up substantially, the asset allocation may get distorted as the proportion of equities may go up to 40-45 per cent which makes the portfolio riskier. At this time, the fund would itself sell some of the equity funds' holdings to bring the allocation between debt and equity instruments back to the defined one. The idea is to give the investor the right asset allocation at all times without the need of him doing anything.

Franklin Life Stage Funds Globally, the concept of life stage funds has been gaining momentum and all major fund management companies like Vanguard, T. Rowe Price and Fidelity offer such funds. In India, Franklin Templeton offers five such funds in its series of life stage funds. Though these funds have not really taken off, but they can add a lot value to investors who want to invest over a long-term in a planned yet hassle-free way.

Another advantage of these funds is that they prevent an investor from acting unnecessarily on his own and trading frequently. In fact one of the reasons for such funds not becoming popular in India is that investors here have a very short-term investment horizon. They book profits in well-established funds to invest in new funds to get 'cheaper Rs 10 units.' For such investors, the concept of life-stage funds simply won't work.

The five funds offered by Franklin, namely, Franklin India Life Stage FoF 20s, 30s, 40s, 50s Plus and 50s Plus Floating Rate are designed to suit largely to the investors in the respective age groups. For example, The 20s plan is meant for an investor in his twenties, who is supposed to have a higher risk appetite.

Therefore, the 20s Plan invests heavily in equities (around 80 per cent of the assets) while maintaining a small portion in debt. As we move to the plans for higher age brackets, the proportion equities will continue to decline progressively.

How this will work for an investor in a hassle-free way is simple. An investor in his 20s, can simply invest in the 20s Plan. Once he reaches his 30s, he can move his money to the 30s Plan and so on till his retirement. This way he will ensure that he has an appropriate asset allocation at all times without him having to do much.

On should note here that a particular plan merely indicates the age group for which it is suitable but there is no age restriction. Therefore, a risk-averse investor in his 20s can very well choose the 30s plan if he thinks 20s plan will be too risky for him.

All the life stage plans of Franklin Templeton invest in other funds of Franklin Templeton, namely, Franklin India Bluechip Fund, Franklin India Prima Fund, Templeton India Growth Fund, Templeton India Income Fund and Templeton India Income Builder Account.

The proportion of these funds in each life stage plan varies and portfolio re-balancing is done on a half-yearly basis to ensure adherence to the defined asset allocation.

The drawback of such plans is that they offer a limited choice as they will only be investing in a combination of five Franklin Templeton Funds. However, they come from a very reputed fund family and are investment worthy on a stand alone basis. Therefore, there is little to doubt as far as the quality of portfolio is concerned.

Increasing the complexity of your portfolio does not make it more successful. Keeping things simple and suited to your needs is what works the best and this is exactly what these funds have to offer. Perhaps life stage funds are a product ahead of their time in India.