Are you interested in learning more about the risks of older persons investing in mutual funds? Read this article to learn about the secure and risk-free mutual fund options available to older adults.
On the one hand, many individuals in India want to retire early, while on the other, life expectancy is gradually rising. In such a situation, most people’s retirement funds will need to endure at least 25 to 30 years. The purpose of this essay is to discuss whether or not senior citizens should invest in mutual funds. What should the plan of action be?
Investing in mutual funds is a good idea for senior adults.
Let’s take a closer look at the two points of longer life expectancy and early retirement to see if there’s a case to be made for senior persons investing in mutual funds.
Increased life expectancy – As medical knowledge advances, life expectancy has increased in recent years and is anticipated to continue to rise. According to some estimates, India’s current life expectancy is 71 years. Life expectancy may rise to 75-80 years by the time the present generation retires.
Financial Independence and Retire Early (FIRE) – Many people have become Financial Independence and Retire Early (FIRE) aspirants, with the goal of retiring far earlier than the traditional retirement age of 60 years.
Low interest rates and rising inflation – Interest rates in India are currently among the lowest witnessed in the recent decade. Interest rates in the industrialised world are approaching zero or even negative. In the future, India may also go in that path. Inflation is at an all-time high right now. Even if the interest rates on fixed-income products are positive, the high inflation rate reduces or eliminates the real returns.
Given the combination of early retirement and rising life expectancy, most people will require a retirement fund that will last for at least 25 to 30 years. Will your retirement savings last that long, though, with high inflation and low interest rates? As a result, senior citizens may choose to consider investing a modest percentage of their retirement fund (10-15%) in mutual funds.
Senior citizens’ asset allocation
Equity mutual funds have the potential to provide substantial returns that outperform inflation. Senior individuals should consider investing a modest percentage of their retirement portfolio in equities mutual funds for the long term to extend the life of their retirement savings.
Senior citizens should use proper asset allocation and diversify their investments across several asset classes, such as:
1. Fixed income goods: Fixed income products, such as:
- Debt mutual funds for capital preservation and a systematic withdrawal plan (SWP) for monthly income on a regular basis
- SCSS (Senior Citizens Savings Scheme) provides Section 80C tax benefits, strong returns, and quarterly income
- PMVVY (Pradhan Mantri Vaya Vandana Yojana) for capital preservation, high returns, and a monthly pension
- POMIS (Post Office Monthly Income Scheme) is a capital protection and monthly income scheme offered by the Post Office.
2.REITs and InvITs – Seniors can put a modest amount of their retirement savings into real estate investment trusts (REITs) and Infrastructure Investment Trusts (IITs) (InvITs). These products pay a quarterly dividend and have the potential to grow in value.
3.Sovereign gold bonds (SGBs) – Sovereign gold bonds can be a tiny portion of a retirement portfolio (SGBs). Gold is widely regarded as a safe haven against rising inflation. Gold also performs well in times of economic instability. SGBs provide gold exposure in an electronic format. They pay a yearly interest rate of 2.5 percent (paid semi-annually). If a bond is redeemed on maturity with the RBI, the long-term capital gains tax is waived.
Finally, over the long term, a small portion of the retirement portfolio should be put in equities mutual funds. Within equities funds, you can choose a mix of index and balanced funds. Senior persons should avoid investing in mid-cap, small-cap, sector, and thematic funds due to the significant risk and volatility involved. Equity mutual funds have the ability to deliver above-inflation returns and extend the life of your retirement portfolio.
We learned how older individuals should allocate and invest a modest percentage of their retirement assets in equities mutual funds in the previous section. Now, let’s look at how older adults might use the three-bucket technique to invest their whole retirement fund.
Investing in a retirement fund with a three-bucket strategy
Senior citizens might consider investing in their retirement fund using the three-bucket technique. The three-bucket retirement investing approach was devised by Harold Evensky. According to this technique, you should divide your retirement fund into three categories:
1.Immediately available bucket
The retiree can keep an amount in this bucket to cover his or her costs for the next two years. The money can be put into liquid fixed-income securities that pay out a monthly income.
The money can be put into monthly income instruments like:
Monthly interest is paid through the Post Office Monthly Income Scheme (POMIS).
PMVVY (Pradhan Mantri Vaya Vandana Yojana) is a monthly pension scheme.
Debt mutual funds with a monthly systematic withdrawal strategy, such as liquid funds, low term funds, or money market mutual funds (SWP)
Bucket in the middle
The retiree can keep an amount in this bucket that will be needed to cover costs for the next three to ten years. The individual may want to put 15-20% of his or her retirement savings into the intermediate bucket. The money can be invested in a variety of financial items, including:
SCSS (Senior Citizens Savings Scheme) pays quarterly interest and provides tax benefits under Section 80C at the time of investment.
Quarterly dividends are paid by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). They also have the potential to increase in value.
SGBs (Sovereign Gold Bonds) pay a 2.5 percent annual interest rate (payable every six months). They monitor the price of gold and have the potential to provide long-term capital gains.
PPFs provide tax advantages at the time of investment under Section 80C, as well as tax-free maturity proceeds. By the time you retire, make sure the PPF account has finished its 15-year term. After 15 years, your PPF becomes liquid, allowing you to make one withdrawal per year.
The debt component of conservative hybrid mutual funds is on the higher side (65 percent or higher).
Bucket for the long haul
The retiree can keep an amount in this bucket that will be needed beyond ten years. Individuals may consider putting 10-15% of their retirement savings into the long-term bucket. The money can be invested in a variety of financial items, including:
Balanced mutual funds with a higher than 65 percent equity component. To get the benefits of compounding, the investing time horizon should be extended.
Index funds invest in all assets that make up the benchmark index, such as the Nifty 50 or Nifty Next 50 Index, in accordance to their weight in the index. They give index returns by replicating the index’s performance.
Credit risk mutual funds invest in bonds issued by companies having credit ratings that are lower than the highest. These funds have the potential to pay off handsomely.
Buckets are reviewed and rebalanced once a year.
The older citizen should review the three buckets with their financial counsellor at the start of each year.
1.Replenishment of the immediate bucket: You would have used up the one-year amount for the previous year’s expenses from the available balance for two-year expenses. As a result, at the start of each year, the immediate bucket will need to be replenished with one-year expenses. You can reload your account with interest, dividends, and other income earned during the year. If there is a deficiency, you can use the intermediate bucket to make up the difference.
2.Replenishment and rebalancing of the intermediate bucket: You should review the asset allocation in the intermediate bucket at the start of each year. If a particular asset class has performed very well, you may sell some of its units and reinvest the proceeds in other asset classes to restore the asset allocation to its original state. You can also move money from the long-term bucket if there is a deficiency in this bucket.
3.Long-term bucket rebalancing: At the start of each year, you should review the asset allocation in the long-term bucket. If a particular asset class has performed very well, you may sell some of its units and reinvest the proceeds in other asset classes to restore the asset allocation to its original state. If a new financial product is offered, you should determine whether or not you need to invest. If you need to get out of an existing financial product, you should do so.
Seniors should consider putting a small amount of their savings into mutual funds.
The three-bucket investment method allows seniors to put a tiny portion of their retirement savings into equity mutual funds. Equity mutual funds have the ability to provide inflation-beating high returns in the long run, which can help seniors maintain their overall retirement fund for a longer period of time.
Using the Glide Invest App to invest in mutual funds
We saw how retirees could invest their retirement assets using the three-bucket technique, with a modest amount in equities mutual funds, in the previous section. For your financial planning journey, you can use the Glide Invest App to get recommendations for appropriate mutual fund schemes depending on your risk profile.
You’ll get advice from Glide Invest on:
- An evaluation of your personal risk profile
- Defining your financial objectives
- Asset allocation that is appropriate
- Creating a financial strategy for each objective
- Automating the budgeting process
- Your financial plan will be examined and analysed.
- You will be held in my arms till your financial objectives are met.