Data shows that over periods of 5, 10, or 15 years and longer, returns from equity mutual funds have consistently beaten inflation. This is important for long term wealth creation. However, in the short term, returns from equity can be volatile.

If you have missed the early bus to wealth creation through equity MFs, are you worried that it may be too late to take on the risk that comes with it? The solution to this dilemma lies in approaching your investments through asset allocation. Having some equity exposure works at any point in time. However, you need to manage the risk by combining other products like debt mutual funds.

While the level of equity you include in your investment portfolio will also depend on your ability to withstand short term volatility, if you have enough to cushion your expenses for at least 10 years, a minimum 60% plus allocation to equity is not unwarranted.

Here is how you should approach equity investing if you are a late starter.

Close to retirement

As private sector job growth increased, so has the insecurity of retirement without relying on a government pension. If retirement is less than 5 years away, do three things:

  1. Check the aggregate value of your other investments like EPF, small savings, fixed deposits and any property that you had bought as an investment.
  2. Estimate how much of this is available to you in the form of cash by the time you retire.
  3. Estimate how many years of expenses this amount of cash can cover.

If the sum above is enough to sustain your expenses, estimated contingency, utility and lifestyle, for at least 10 years, then you can consider allocating higher proportions of your incremental investments to equity.

While the level of equity you include in your investment portfolio will also depend on your ability to withstand short term volatility, if you have enough to cushion your expenses for at least 10 years, a minimum 60% plus allocation to equity is not unwarranted.

This will help further build your equity corpus over the next 10 years, in an attempt to allow your investments to cover up to 25 years of expenses post retirement.

However, if your savings so far will not be sufficient for a long period to fund post retirement expenses, think about cutting back on some expenses first. Secondly, allocate 30-40% to equity and rest to more stable debt investments. This way you will be able to grow your money with limited risk as more than half of your investments will be in stable return products.

Post retirement 

With no active income, your ability to risk your savings gets lowered. While your choice of how much equity to add will depend on many factors like lifestyle, accommodation, family size and so on, you should consider a minimum of 15%-20% allocation to equity in order to have the benefit of inflation plus returns in some part of your investments.

As lifespan increases and inflation adds to expenses, adding equity investments will help you retain your level of expenditure for a longer period post retirement than you can achieve solely with fixed return products.