A reader says, “I am 21 and about to start my first job. How do I figure out how much to invest in equity mutual funds and how much to invest in fixed income? My friends tell me to invest 80% to 100% in equity. Is this correct?
There is no right or wrong answer to this question. It is about discovering “how much equity I would be comfortable with?” And this may take a lifetime! However, some basics should be in place. A portfolio requires the impetus equity offers (from time to time) to surge ahead, but it also needs the stability of fixed income when equity underperforms (from time to time).
So, we need to strike a balance. An equal mix of equity and fixed income (debt) is the most balanced choice. Contrary to what many equity “enthusiasts” may think, It will work just fine. Take my word for it, or you can see the data: Will Benjamin Graham’s 50% Stocks and 50% Bonds strategy work for India? A 60-70% equity allocation is also fine, but don’t expect a joy ride.
For those who prefer a technical answer, Using reasonable return expectations for equity and debt (after tax!) and considering the inflation for my goal, I can arrive at an approximate overall portfolio return (after tax).
I adjust this allocation and return expectation considering the amount I can invest for my goal, ensuring the return expectations are still reasonable. The steps are explained here: Deciding on asset allocation for a financial goal.
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Also, try the freefincal Asset Allocation Calculator on the SEBI investor website developed by M. Pattabiraman. These are among the nine freefincal calculators hosted there.
At 21, you have the biggest resource on your side – time. So, I urge you to consider the following:
- Be emotional about your financial future. Tell yourself the key to achieving financial independence as soon as possible so you have options.
- Choose 50% to 70% equity and the rest in fixed income. You can start with 50%, get comfortable with it and then increase it to 60% or 70%.
- As you age, you will only grow confident about equity – ensure it does not turn to overconfidence. Never forget equity is like fire. Fire is indispensable, but getting too comfortable with it can burn us.
You cannot determine your risk-taking ability by reading or viewing content or taking a quiz to “determine your risk appetite”. Learning about risks takes time, so start with something and learn on the fly. However, create a plan before you start so that you have a path to start with. You can always course-correct down the line.
At 21, the answer is simple. Older investors who have not taken enough risk before should compensate by increasing their investments as much as possible and modifying their financial goal expectations. They should gradually increase equity allocation depending on their age and emotional tolerance. Counsel from a SEBI registered fee-only advisor will help immensely (link points to our curated list of advisors).