Should senior citizens invest in mutual funds?

Many times we hear about investing in mutual funds and the risks associated with investing money in them. Considering how most investment funds invest in the market, senior citizens often refrain from investing in them. The aftermath of recent market volatility has caused many investors to suffer unwanted losses, leading to more questions about whether senior citizens should invest in mutual funds. The idea behind allocating a portion of your earnings to mutual funds is to earn returns that not only help build an adequate corpus but also beat inflation.

The key to success is to make your money work for you, regardless of age. As age is a major limitation for senior citizens, it is imperative that they invest wisely. Various investment opportunities are available to senior citizens. However, what works for one investor may not work for another. Many people misconstrue mutual funds as too risky for older investors. This has led many of them to opt for other investment options.

However, mutual funds are useful for seniors and can be a worthwhile investment option. Despite the fact that markets are subject to short-term shocks, the mechanisms used here have yielded better long-term returns than so-called traditional investment strategies. Each mutual fund invests in a different asset class and provides a different level of return. Mutual fund returns are market-linked, meaning they are never guaranteed. However, this exposure to risk provides an opportunity for wealth creation and growth. Ignorance of mutual funds designed according to the profile and risk appetite of senior citizens contributes to frequent conundrums.

Keeping in mind that the idea behind investing in mutual funds is to earn a decent return without exposing yourself to undue risk and not to commit to an investment for a long period, say 10 years, senior citizens can start by putting some portion of their earnings into debt funds. Debt funds yield more returns than bank deposits, including fixed and term deposits. While it can be argued that the return on debt funds is similar to that of senior citizen savings schemes or postal deposit schemes, the tax benefits on the former guarantee a higher internal rate of return (IRR), thereby benefiting senior investors. In addition, senior citizens have the advantage of withdrawing money at will, unlike most pension plans or products such as the National Pension Scheme (NPS) which mandate withdrawal only after a certain period of service.

There is another advantage of parking money in debt funds, and that is diversification. Mutual fund houses design portfolios to suit different asset classes. To begin with, senior citizens can start by investing money in debt funds to meet their regular expenses. The remaining part of the money can be allocated in balanced mutual funds for a longer period, thus achieving the double benefit of good returns and stability. Alternatively, they can lock their money through Systematic Investment Plans (SIPs) in large-cap funds, thereby relieving them of extreme volatility due to their investments in large-cap stocks. However, different people invest for different reasons, which means they need to consider their financial goals, risk profile and investment duration. Senior citizens who enjoy enough liquidity for the next decade can consider investing for the future. However, they must keep in mind that they will only benefit from the power of compounding if they remain invested for an increasingly long period of time.

Senior citizens, however, must keep in mind that debt funds and debt-oriented hybrid fund investments held for less than three years are subject to Short Term Capital Gains Tax (STCG) and therefore have to pay tax as per their tax bracket. Redeemed investments are treated as long-term capital gains (LTCG) if the gains are realized after holding them for at least three years. After indexation, LTCG is taxed at 20 percent.

Science allows people to live longer than expected. Some biologists even predict that within a few generations human life may exceed 100 years. It makes sense to plan ahead. Investing in a combination of senior citizen savings schemes and mutual funds will help many achieve financial independence even in their later years.


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First published: January 18, 2023, 8:03 am IST

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