Achieving Financial Goals with Lifecycle Investing

Author: Ikkurthi Ramaiah, Director, Ikkurthi Financial Services Pvt Ltd

Investments gain purpose and direction when they are directed towards achieving specific targets. And financial goals are as varied as they come. Buying a fancy gadget, taking vacations abroad or to exotic domestic locations, purchasing a house or a car, saving for children’s college education and their marriage, and finally accumulating enough for your own retirement are some such financial goals.

These goals are of multiple time horizons: short, medium and long, stretching anywhere from three years to 20-25 years. One needs to plan for goals at every stage of life. That forms the crux of goal-oriented lifecycle investing. Lifecycle investing broadly involves taking exposure to asset classes suited for specific targets over a defined period.

Challenges faced by investors

Asset classes tend to vary in the way they rally, and their trajectories are often independent of each other. In the 14 calendar years from 2012 to 2025, equities were the top performers in six years. Gold, too, was the leader among asset classes in six of those years, while debt was the top performer in two years.

An investor individually deciding on an asset allocation mix for a money goal and then redeeming the proceeds as the target gets achieved within the defined period is easier said than done.

First, choosing the right set of stocks, bonds and commodities to invest in, and the right instruments to do so, is quite difficult for retail investors, as geopolitics, valuations, Central Bank actions, macroeconomic factors and government policies are hard to decipher for smart decision making. Second, there is the cost of switching within assets and between asset classes that could involve additional expenses and taxes. Finally, there is the critical aspect of significant portfolio erosion in case the market declines closer to a goal’s timeline.

For lifecycle investing to work smoothly, the ideal option would be to consider funds catering to goals with pre-defined timelines.

Lifecycle funds as solutions

Lifecycle funds invest in a diversified basket of asset classes such as equities, fixed income instruments, commodities (gold and silver ETFs), exchange-traded commodity derivatives and infrastructure investment trusts InvITs in a suitable mix. A single product gives access to all these asset classes, and investors do not have to explore multiple instruments.

The key feature of lifecycle funds is the glide path strategy. In the earlier years of the investment timeframe, exposure to equities is higher to enjoy the growth benefits of the asset class. Closer to the goal timeline, exposure to equities is pared back, and debt as well as safer investments are increased to preserve the gains and prevent erosion from volatility.

The portfolio is actively managed with internal models and research inputs after tracking a host of macroeconomic factors and business fundamentals. The fund rebalances the portfolio as and when needed to maintain an optimal risk-reward payoff.

Since lifecycle funds come with predetermined maturity, all that investors need to do is choose a fund that matures closest to their goals. Different lifecycle funds can be chosen for different goals. Investors with a goal 20 years away can choose a fund maturing in 2046, for example.

Finally, lifecycle funds take away all behavioural biases of investors such as loss aversion bias, herd mentality and recency bias, allowing them to remain focused on their goals through adequate investments in these schemes.