Investment tips: In your 30s or 40s? Age-based asset allocation strategies to grow your money

Asset allocation based on the age of the investor

The basic principle behind age-based asset allocation is that your exposure to investment risk needs to reduce with age. It is primarily referred to as the proportion of equity as a  component of your portfolio as these investments offer a higher return at a greater risk. “You can use the thumb rule to find your equity allocation by subtracting your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds toward debt funds and fixed-income investments. Suppose your current age is 25 years. Your portfolio may have 75% of equity-oriented investments and the remaining 25% among debt funds and fixed-income securities,” said Ajay Agarwal, associate partner Alpha Capital.

30s vs 40s: How investment strategy varies

Amit Gupta, MD, SAG Infotech said that you possess a longer investing vision in your thirties, which allows you to decide to take on greater risk in quest of bigger returns. You might dedicate a bigger share of your investment portfolio to higher-risk, higher-reward assets like equities, which include specific stocks and equity funds. 

“If you want to limit the risk associated with equity markets, investing in ULIPs could be considered,” said Agarwal

“As you enter your forties, you may begin to rebalance your portfolio to incorporate a somewhat greater proportion of more stable investments, such as bonds. While equities can still play a substantial role, the portfolio should become more balanced as retirement approaches to limit possible volatility,” said Gupta.

You can also consider investing in real estate for a home or to generate rental income.

An effort should be made to have a balanced portfolio – that is – having 40% equity and 40% debt funds. “Around 5% should be kept as emergency cash. Around 5% should always be maintained to take advantage of new opportunities,” said Ajay Agarwal. 

Before considering how to invest during the different stages of your life, it’s helpful to understand the concept of asset allocation.  Often we come across the term asset allocation. What is it? To put it simply, it means, you have to distribute the money that you want to invest among different assets like gold, real estate, stocks and mutual funds, bonds, PPF, and EPF. The manner in which you will distribute all these assets is known as asset allocation.

Three main asset classes are

Stocks (equities)

Bonds (fixed-income securities)

Cash and cash equivalents

Other asset classes include:

Commodities

Real estate

Why diversification is important

“If you put all your money into one asset class (i.e., all your eggs in one basket), and that class tanks, you have no hedge to protect your capital. Investing in a variety of asset classes provides diversification in your portfolio. Here is how to invest in your 30s and 40s,” said Ajay Agarwal. 

Experts say that individuals may gradually shift from equity to debt investments as they approach retirement. 

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 02 Sep 2023, 01:20 PM IST