A lot can happen between a scroll and a swipe. The securities regulator managed to do both on behalf of investors who look at efficient asset allocation as they age and walk down what has been identified as their “glide path”. And thereby hangs a tale.

The long and short of it is simple, and the essence of Sebi’s move must have already become public knowledge. The market watchdog has cottoned on to the idea that is often termed as ‘life stage planning’ — it has proposed Life Cycle Funds (LCFs), a rather new concept for most Indians.

Let us stretch the point a bit. Consider two scenarios. In the first, there is a 30-year old individual, perhaps a smart lady who is busy as a professional employed in a private-sector company. In the second, let us imagine a 60-year old gentleman, ready to retire, spending his last months in his office. Two different individuals, two sets of circumstances. Consequently, two distinctly different financial objectives, right? Yes, absolutely.

The first individual should now accumulate and organise her assets for the sake of building wealth. Perhaps she earns reasonably well at this juncture, but to be honest, she must remain consistent with her investments. Regular SIPs in equity funds (with annual top-ups) are a solution for her. The aim here is simple — a decent corpus that she will need after about three decades.

A word about consistency will not be out of place. We should not have a situation where an investor chases mid- and small caps for a few quarters, and then abruptly stops her allocations. Remember, market corrections are natural. These should not deter us, assuming that there are no material changes in our circumstances.

Cut to the second scenario. Retirement is drawing close for this individual. It is an immediate, near-term milestone to cross. The investor concerned must devise a drawdown plan. Perhaps quarterly SWP is his obvious choice, and rightly so. This is time for him to extract the benefit of his savings strategy.

The two cases are very dissimilar. In the first, risky assets are not a real threat. These do have a certain potential to deliver returns. In the second, however, the investor may want to reduce his risk significantly. Income-generating tactics are in order.

Such scenarios are two of many, we can conceive them one by one. Sebi has thought through these as well. The newly-proposed Life Cycle Funds will help address a major issue for the common man. Here, the “problem” refers to what is often identified as “decision fatigue”. Those who study investor behaviour often say that ordinary folks are frequently too dazed by reality. Decisions, therefore, are often flawed. Returns suffer as a consequence.

Here are some stereotypes to help you appreciate the issue. All written in the first person, please note.

Case 1: I am a 25-year old, early-career worker, not a typical householder yet. Undecided with respect to the following questions —

• When should I step up my equity allocation?
• How much debt should I accommodate?
• Are commodity markets too risky or expensive for me now?

Case 2: I am a 40-year old mid-market executive, still working on a retirement plan, a parent with dependants. Undecided regarding —

• Should I be very aggressive, get into small caps or sectoral indices?
• Should I acquire a big housing loan, keep paying EMIs for the next 10 or 15 years?
• Should I sell some family gold, now that gold prices are high?

Case 3: I am 65, retired with a modest corpus, in reasonably good health, occupy my own home. My questions —

• I need to remain conservative, but should I drop equities altogether?
• Should I have more FDs or bonds and get interest income?
• Should I sell surplus real estate, if any, and invest the proceeds in debt funds?

How can LCFs help?

Well, let us quickly refer to “glide path” again. Imagine a trajectory which does what an ordinary investor often fails to do. It keeps a relatively young investor heavily invested in equities today. And it automatically pares his risk when he ages. In other words, some of the emotions associated with investing are obviated.

A point to note is that LCFs will most definitely result in newer options for the average investor. He must take great care in exercising choice. As things stand, there are plenty of nuanced funds in the markets, some of which are dynamically managed. LCFs will add to this lot.

Criticism

For every action, there is an opposite (but perhaps unequal) reaction. Let us underscore the fact that an automated investing process takes away some of the emotional elements. So where do sharp changes in market conditions lead us?

A question here: should the “glide path” totally ignore such changes? (See chart). If the stock market goes through a big upheaval and valuations decline drastically, should we not invest a lot more in equities to take advantage of the situation?

Similarly, when the debt market is spiralling, should we not see this as an opportunity and invest in fixed-income securities even more?

The answer is rooted in one simple premise: time, not sentiment, is the force to reckon with in the case of LCF.

For a 35-year-old urban Indian investor who juggles his EMIs, the equation looks straightforward. “My investments will grow older just as I grow older”— that is how he should see it.

Similarly, at the other end of the spectrum, is a senior individual whose corpus has matured with age. His challenges are unique. Capital protection matters to him way more than just returns. He is fully aware of risks, because a single crash can spoil his retirement security for ever. So his portfolio need not have too much equity or even commodities. Imagine such a person learning about life the hard way. How will an individual feel if his portfolio valuation suddenly reduces by, say, 30 per cent!

NIlanjan Dey is partner at Wishlist Capital