How the Glide Path Investment Strategy Works

What is the Glide Path Investment Strategy?

In mutual funds, a glide path is an investment strategy that shows how the asset allocation changes over time. It gradually shifts from high-risk investments to low-risk investments, and lays out a structure for shifting the proportion of different assets.

Stages of the Glide Path

The glide path can be classified into three stages:

• Early Stage: In the early stage, the investment term is long, and the portfolio has a lot of equity and other high-risk assets. The goal is to make money over the long term.
• Mid Stage: As the goal gets closer, the allocation moves toward a mix of fixed-income and equity investments.
• Late Stage: When you're getting close to retirement, the last stage of the glide path, portfolio changes to include more fixed income and low-risk assets to provide income and protect capital.

Types of Glide Path

Based on changes in the asset allocation over time, glide paths can be of the following types:

1. Declining Glide Path

   It gradually decreases equities and increases investment in debt funds. In the early stage, the equity allocation is highest. It then shifts towards safer assets or debt instruments. It also reduces market risk as the target date approaches and is commonly used in retirement and lifecycle funds.

2. Rising Glide Path

   Instead of decreasing, it increases equity exposure over time, gradually transitioning from safer assets to more growth-oriented investments. Investment starts with safer assets, gradually moving towards growth-oriented investment. It is suitable when risk capacity grows with time and is less common than a declining glide path.

3. Static Asset Allocation Strategy

   It maintains a fixed asset allocation throughout the investment timeline, with minimal changes to the proportion of equity and debt exposure. It aims to maintain a relatively constant risk and return profile. It is more common in balanced or hybrid funds.

Key Takeaways

A glide path allows investments to gradually shift according to a predetermined schedule. It usually shifts from high-risk assets to low-risk assets as the target date approaches. It is classified into three stages: early, mid, and late stages.