In investing, there are two aspects that should be considered.
The first is the appropriate asset allocation. This is just a term given to investing money across equity (shares) and debt (fixed income) to suit one's needs and time horizon.
The second is constantly rebalancing the above, depending on your changing needs and goals.
Now we have a mutual fund trying to do that for you. This one is a life stage fund.
What is a life stage fund?
It is basically a fund of funds. This is a fund that specialises in buying units in other funds.
It aims at maintaining an asset allocation suited to investors of a particular age group. And, then, keep re-balancing their asset allocation after fixed intervals of time to maintain the defined allocation.
For example, a life stage fund for an investor in his 40s currently will allocate, say, 35% of assets (investments) to equity schemes and 65% to debt schemes.
If the equity market goes up substantially, the asset allocation may get distorted as the proportion of equities may go up to 45% which makes the portfolio (total investments) riskier. At this time, the fund would sell some of the equity fund holdings to bring the allocation between debt and equity instruments back to the defined one.
The idea is to give the investor the right asset allocation at all times without the need of him doing anything.
The basket
Franklin Templeton offers five such funds in its series of life stage funds.
The five funds offered by Franklin Templeton cover various age groups: Franklin India Life Stage FoF 20s, 30s, 40s, 50s Plus and 50s Plus Floating Rate.
The 20s plan is meant for an investor in his twenties, who is supposed to have a higher risk appetite. Therefore, it will invest heavily in equities (around 80% of total assets). As we move to the plans for higher age brackets, the proportion equities will continue to decline progressively.
How this will work for an investor in a hassle-free way is simple.
An investor in his 20s, can simply invest in the 20s Plan. Once he reaches his 30s, he can move his money to the 30s Plan and so on till his retirement. This way he will ensure that he has an appropriate asset allocation at all times without him having to do much.
Though a particular plan merely indicates the age group for which it is suitable, there is no age restriction. Therefore, a risk-averse investor in his 20s can very well choose the 30s plan if he thinks 20s plan will be too risky for him. Or, a person in his thirties can well choose the 20s plan.
Where is the money invested?
Since it is a fund of funds, it will invest only in other funds.
Here, the selection will be limited to other funds of Franklin Templeton: Franklin India Bluechip Fund, Franklin India Prima Fund, Templeton India Growth Fund, Templeton India Income Fund and Templeton India Income Builder Account.
The proportion of these funds in each life stage plan varies and portfolio re-balancing is done every six months to ensure adherence to the defined asset allocation.
Should you?
The drawback of this particular plan is that it offers a limited choice as investing will only be done in a combination of five Franklin Templeton Funds. However, these funds come from a very reputed fund family and are investment worthy on a stand alone basis. Therefore, there is little to doubt as far as the quality of portfolio is concerned.
An advantage of these funds is that they prevent an investor from acting unnecessarily on his own and trading frequently. In fact, one of the reasons for such funds not becoming popular in India is that investors here have a very short-term investment horizon. They book profits (sell units when the price rises) in well-established funds to invest in new funds to get 'cheaper Rs 10 units.' For such investors, the concept of life-stage funds simply won't work.
Globally, the concept of life stage funds has been gaining momentum and all major fund management companies like Vanguard, T. Rowe Price and Fidelity offer such funds.
Though these funds have not really taken off, but they can add a lot value to investors who want to invest over a long-term in a planned yet hassle-free way.
Perhaps life stage funds are a product ahead of their time in India.
