Lifestyle Fund

The lifestyle, consumption patterns, and aspirations of the burgeoning middle class are witnessing a paradigm shift as India races towards becoming the third-largest economy in the world. With rising consumerism and changing lifestyles in India, many companies are benefiting from this change. To take advantage of this opportunity, many mutual fund schemes in India have started to invest in a diversified portfolio of equities/equity-related securities to provide you with the benefits of long-term capital appreciation, called lifestyle funds.

There is a difference between investing in a lifestyle fund and having a diversified MF portfolio. In general, a lifestyle fund does not invest in capital goods or IT stocks.

The fund managers of these funds emphasise investing in companies with long-term growth projections and sustainable cash flows. Thus, these lifestyle funds help investors achieve different goals and do not follow a glide path while investing. Instead, they focus on your style of investing by following your way of managing an investment portfolio over time.

Let us explore the meaning of lifestyle funds below.

What is a lifestyle fund?

Lifestyle funds are specialised investment funds that have been designed as per your risk preference and take care of your specific investment goals.

Most traditional funds invest in multiple securities (stocks, bonds, and other securities) to balance between risk and return. On the other hand, lifestyle funds are highly customised funds that create personalised investment strategies for you to take care of your specific needs. By investing in a lifestyle fund, you can take care of your specific lifestyle/financial goals.

When a fund manager creates customised investment strategies for your lifestyle goals, they keep three things in mind:

1. Your specific risk preference
2. Your age
3. Your specific investment objective
   

How do lifestyle funds work?

A lifestyle fund usually helps you meet your specific long-term financial goals and needs. However, they do not follow a one-size-fits-all investment approach. Every lifestyle fund scheme depends upon the stage of your life and your preferred investment style.

There are various kinds of lifestyle funds, which vary depending on your age at the time of investing, risk tolerance level, and preferred style of investing.

The funds vary according to your risk profile, such as:

• Conservative
• Moderate
• Aggressive

Once you choose a fund according to your risk tolerance level, you can invest as per your preferred investment strategies, such as:

1. Income strategy
2. Growth strategy
3. Value strategy

Usually, young professionals tend to prefer riskier lifestyle funds because they look for long-term growth of their funds.

Middle-aged people in their mid-40s or 50s prefer a balanced portfolio, which is characterised by downside protection during the falling market and increasing profit during bull runs. That is why they invest in value strategy-based lifestyle funds.

However, older investors (especially persons nearing retirement) prefer a conservative fund investing style. This is because they:

• Keep your investment’s principal amount secure
• Provide you with a regular income.

The concept of investing followed by lifestyle funds is known as MPT or Modern Portfolio Theory. A fund manager invests in an optimal mixture of equity and debt, which again depends upon your risk tolerance level. These funds usually offer a broader range of diversification.

A lifestyle fund is similar to a standard balanced fund. However, these managed funds provide you with an investing vehicle that helps you fulfil a specific investment goal and comes with a specified date of withdrawal.

As lifestyle funds help you achieve a specific goal, such as a retirement objective, they are also called target funds. However, they are different from typical target funds in the sense that the fund managers of these funds do not shift fund allocation in the manner following a glide path over your investment’s life period. Their focus is to allocate funds based on your risk-taking propensity and the age at which you are investing.

Examples of lifestyle funds

Here are two examples explaining the purpose of lifestyle funds and how you can use them to achieve specific investment goals at different stages of your life.

Example 1: Wealth accumulation

Let us assume Rajesh is in his early 20s and recently graduated. Within one year of his graduation, he got a job.

Just like any Indian middle-class family, his father and elders advised him to start investing early. They advised him to invest in fixed deposits and other fixed-income schemes like PPF and NSC. However, as a young professional, he did not want to invest in assets that gave 6-8% return. After adjusting for the inflation rate, Rajesh would have hardly received 1-2% returns annually.

He took his father’s suggestions seriously and was anxious to invest to accumulate wealth in the long run. However, he was not prepared to invest all his inevitable funds in just assured return schemes. That is when he consulted financial experts and decided to start investing in lifestyle funds.

The best thing about this investment scheme is that a fund manager would manage Rajesh's money on his behalf to meet his lifestyle goals. The financial consultant also tailored the lifestyle fund according to his age, risk tolerance level, and financial goals.

Rajesh kept investing for over ten years, and his investments grew steadily. The best thing about investing in a lifestyle fund is that it helped him accumulate wealth without having to monitor the markets constantly. It was more worthwhile for Rajesh because he did not have a deep understanding of investing strategies. Even then, by the time he was in his mid-30s, his corpus increased much more than benchmark indices and fixed-income assets.

Example 2: Adjusting your financial growth according to mid-career realities

Mohit is a mid-level manager. He is a married man with two children. The responsibilities of his family are on him completely. He is busy juggling the increasing needs of his family and his career. So, he does not have time to manage his finances actively.

That is when one of his colleagues introduced him to the concept of lifestyle funds. These funds came to his rescue by adjusting his asset allocation according to his evolving risk tolerance level and changing financial goals. His primary goal of investing was to save for his retirement.

When he turned 60, he was pleasantly surprised to see that his investment had grown significantly over the years. This gave him enough confidence to retire and still lead a comfortable lifestyle.

Also read about SIP investment

What are the different types of lifestyle funds?

Lifestyle funds can be categorised into three major types:

1. Conservative lifestyle funds
2. Moderate lifestyle funds
3. Aggressive lifestyle funds

Let us explore, in brief, what they are:

1. Conservative lifestyle fund

• Objective
  A conservative lifestyle fund’s main objectives are to preserve capital and generate regular income.
• Investment plan
  That is why the fund manager invests in assets that provide consistent returns to its investors and ensure low volatility.
• Who should invest
  You should invest in it if you are:
  • A retiree or
  • A risk-averse investor

2. Moderate lifestyle fund

• Objective
  A moderate lifestyle fund’s main objective is to:
  • Provide you with a balanced growth
  • Preserve the capital invested
• Investment plan
  The fund manager invests more funds in stocks than conservative ones. Though the larger allocation in equities increases the volatility of the lifestyle fund to some extent, its performance remains more or less consistent with respect to the overall market condition.
• Who should invest
  You should invest in it if you are:
  • A mid-career professional in his 40s or
  • A person nearing retirement
  • A risk-neutral person

3. Aggressive lifestyle fund

• Objective
  An aggressive lifestyle fund’s main objective is to:
  • Provide you with maximum capital gains
• Investment plan
  The fund manager invests almost all the funds in stocks. Though it may cause more volatility in the lifestyle fund in the short term, it will give you a higher return than moderate and conservative funds in the long run.
• Who should invest
  You should invest in it if you are:
  • If you are in your 20s or 30s and want to invest for a longer timeframe (say, 20 years, 30 years, or more)
  • A person who can take high-risk
  • A person who prioritises growth over stability

When to invest in lifestyle funds

You should invest in lifestyle funds if you are looking for long-term investing. However, the fund you invest in may vary according to your level of risk tolerance and varying life goals.

Case 1: Older person with retirement objective

Suppose you are 50 years old and want to secure a steady flow of income after your retirement. A lifestyle fund will help you achieve that long-term objective. These funds are less risky than traditional funds because their fund managers resort to broad-range diversification.

Case 2: Young and unmarried person with a long-term wealth accumulation objective

Let us now consider a young adult in their 20s or 30s. They are in their wealth accumulation phase and do not have a lot of responsibilities. Therefore, they can take on more risks while investing. So, they can easily invest for 30 or 40 years to avoid short-term price fluctuations and get the advantage of growth and wealth accumulation. Fund managers usually invest most of the funds in stocks for these lifestyle funds.

Married couples with or without children can invest in lifestyle funds that emphasise the benefits of compounding.

Are there any special considerations for lifestyle funds

In the case of aggressive lifestyle funds, the fund managers invest mostly in equities to give the investors higher returns. Diversification is achieved by investing broadly across all segments of the market. Fund managers explore all market opportunities to achieve maximum returns, including investment in various markets and global regions. In the case of conservative lifestyle funds, most of the allocations are done in fixed-income assets and lower-risk financial instruments. This is done to give you a steady income, safeguard your investment’s principal amount during adverse market conditions, and provide a decent return in good market conditions.

Final words

A lifestyle fund is perfect for you if you do not want to create or manage a personalised portfolio of funds. One of the basic aspects of lifestyle funds is that their risk tolerance level does not change over time. That is why a fund manager does not change fund allocation to different assets to adjust to your changing risk profile (especially when you are nearing retirement). Therefore, you should choose a fund accordingly at the time of investment.

If you want to reduce your exposure to high-risk assets (such as stocks) over time or as you near retirement, you should choose target funds over lifestyle funds. Before investing, you should also check the associated fees because they may affect your expected return. There is no one-size-fits-all fund for all individuals. That is, before deciding to invest, you should consult a financial advisor first.

Are you new to investing? Do you want to make money by investing in different types of funds? If yes, you should explore the Bajaj Finserv Mutual Fund Platform. More than 1000 mutual fund schemes from different Asset Management Companies (AMCs) are listed on this platform. You can compare mutual funds, calculate your expected returns on either the SIP calculator or the lumpsum calculator, and then invest in the most suitable funds.

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