Question

explain how the investment objectives of various types of mutual funds and bond funds might be more or less appropriate for individuakls at different stages of their lives

Answer 1

The investment objective of any fund (equity mutual fund or bond fund) can be broadly categorized in the following three categories:

1. Long Term Capital Appreciation
2. Regular Monthly Income
3. Steady Returns

At different stages of life, an individual has different risk appetite and return requirements. Hence, the asset allocation to equities and bonds varies accordingly. A detailed description for different stages of life is given below:

Young Working Individuals

In the age group of roughly 20 - 40 years the risk appetite is higher and significant amount of working years left ahead of them. Hence, they can allocate their capital towards more risky assets to earn higher returns.

A model asset allocation in this stage would be as given below:

Asset	Allocation	Risk Profile	Investment Objectives
Equity Mutual Fund	80%	Moderately High to High	Long Term Capital Appreciation
Bond Funds	20%	Low	Steady Returns

Middle Age Individuals

In this stage of life, the risk appetite would be comparatively lesser. A person has a family to take care of, huge amount of expenses are due and also not a significant amount of working years left. Hence, the capital allocation would be focused towards steady returns generating assets.

A model asset allocation in this stage would be as given below:

Asset	Allocation	Risk Profile	Investment Objectives
Equity Mutual Fund	60%	Moderately High	Steady Returns
Bond Funds	40%	Low	Regular Monthly Income

Elderly Individuals/ Post Retirement

In this stage of life, a person is living on their life savings/ pension plans, etc. Hence, the risk appetite is absolutely low and the capital is required to be allocated to assets which generate regular monthly income which can be used to fund day to day expenses.

A model asset allocation in this stage would be as given below:

Asset	Allocation	Risk Profile	Investment Objectives
Equity Mutual Fund	20%	Medium	Steady Returns
Bond Funds	80%	Low	Regular Monthly Income