Life Cycle Mutual Funds: Investments That
Change According to Your Financial Goal Date..!
R S Kumar, Founder
Sampath Financial Services
Mobile: 98414 08824, ARN
246089
“Money is needed for my daughter’s higher
education 20 years from now. Would it be right to invest in equities now?” Ravi
asked.
“There is no need to say no to equity
investments at this stage. However, as the goal approaches, the money invested
in equities should gradually be shifted towards debt investments,” his friend
replied.
“Do we have to do that ourselves every year?”
Life Cycle Funds!
“That is exactly why Life Cycle Funds
have been introduced!”
Life Cycle Funds are a new category of mutual
funds designed to gradually shift investments automatically from
equity-oriented investments to debt-market investments as the investor’s
financial goal date approaches.
Apart from equities and debt securities,
these funds are also permitted to invest a specified portion in assets such as
gold, silver and InvITs.
Investments That Change According to the Financial Goal!
The key feature of Life Cycle Funds is a pre-determined
investment path.
For example, a Life Cycle Fund with a 30-year
investment horizon will initially have a higher allocation to equities. As the
goal approaches, the equity allocation will gradually reduce, while the
allocation to debt securities will increase.
This reduces the need for investors to
frequently make changes to their investment portfolio themselves.
From 5 to 30 Years!
As per SEBI regulations, Life Cycle Funds can
have a minimum investment horizon of 5 years and a maximum of 30 years. Schemes
can be launched in multiples of five years. Accordingly, funds can have target
periods of 5, 10, 15, 20, 25 and 30 years.
A mutual fund company can have a maximum of
six Life Cycle Funds available for investment at any given time.
The target year is included in the name of
the fund. For example, the fund may be named “Life Cycle Fund 2045”
or “Life Cycle Fund 2055.”
How Does Equity Allocation Reduce?
If we take a 30-year Life Cycle Fund as an
example, its investment allocation may broadly look like this:
|
Time Remaining to Reach the Goal |
Equity Investment |
Debt Investment |
Gold/Silver, etc. |
|
15–30
years |
65–95% |
5–25% |
0–10% |
|
10–15
years |
65–80% |
5–25% |
0–10% |
|
5–10 years |
50–65% |
5–25% |
0–10% |
|
3–5 years |
35–50% |
25–50% |
0–10% |
|
1–3 years |
20–35% |
25–65% |
0–10% |
|
Less than
1 year |
5–20% |
25–65% |
0–10% |
These allocation ranges are subject to the
limits prescribed by SEBI, depending on the target period of the scheme.
Greater Focus on Safety!
As the financial goal approaches, the
allocation to debt investments increases to reduce the impact of equity-market
volatility.
Debt investments should generally be in
securities rated AA or above. Further, the remaining maturity
of these debt securities should not exceed the target period of the scheme.
When the remaining period is less than five
years, equity-oriented arbitrage investments may also be permitted within
specified limits.
Exit Load for Early Withdrawals!
To encourage long-term investment, an exit
load is applicable to withdrawals made before the stipulated period.
|
If the Investment Is Withdrawn |
Exit Load |
|
Within 1
year |
3% |
|
1–2 years |
2% |
|
2–3 years |
1% |
|
After 3
years |
Generally Nil |
Investors should also check the specific
terms and conditions mentioned in the Scheme Information Document before
investing.
Pay Attention to Income
Tax!
Since the investment allocation of a Life
Cycle Fund changes over time, it should not automatically be treated simply as
a “Hybrid Fund” for taxation purposes.
Tax treatment will depend on the actual
equity allocation of the scheme and the income-tax rules applicable at the
relevant time. Therefore, investors should carefully examine the scheme
documents and the prevailing income-tax rules before making an investment
decision.
Who May Find This Suitable?
Life Cycle Funds may be useful for investors
who want to invest for the long term towards specific future financial goals
such as retirement, children’s higher education or marriage,
particularly when they prefer an investment structure that automatically
changes asset allocation as the goal approaches.
However, investors should not assume that
“the money will be completely safe once the target date arrives.” These funds
continue to have a certain allocation to equities, and therefore remain subject
to equity-market risk. In particular, during the initial years, the higher
equity allocation can result in fluctuations in the value of the investment.
Equity for growth when the investment
horizon is long; debt-oriented investments for greater stability as the goal
approaches — this is the basic
approach behind Life Cycle Funds.
Deciding the financial goal and starting the
investment is one part of the process. Reducing risk as the goal approaches is
another. Life Cycle Funds attempt to combine these two aspects through a single
investment structure.
-
For More Details and Investment Assistance
R S Kumar, Founder
Sampath Financial Services
Office Address:
M Block 305, Appasamy Bloomingdale Apartments
East Main Road, Shankar Nagar,
Pammal, Chennai - 600 075
Mobile: 98414 08824
Email Id: sampath.financialplan@gmail.com
ARN 246089
15 Years of Experience in Mutual Fund Industry (Customer Service and
Operations)
Disclaimer: Mutual Fund investments are subject to
market risks, read all scheme related documents carefully. The past performance
of the mutual funds is not necessarily indicative of future performance of the
schemes.
