Should senior citizens invest in mutual funds?

Many times we hear about mutual fund investments and the risks associated with putting money in them. Considering how most mutual funds invest in the market, senior citizens often restrain themselves from investing in them. The aftermath of market volatility in recent times has caused many investors to suffer unwanted losses, thus, raising more questions as to whether senior citizens should be investing in mutual funds. The idea behind allocating a part of your earnings to mutual funds is to earn returns that not only help build 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 constraint for senior citizens, it is imperative that they invest wisely. There are a variety of investment options available to senior citizens. However, what works for one investor might not work for another. Many people misconstrue mutual funds as being too risky for senior citizen investors. This has caused many of them to opt for other investment options.

However, mutual funds are advantageous to the elderly and can be a valuable investment option. Despite the fact that markets are susceptible to short-term shocks, the mechanisms used here have produced better long-term returns than so-called traditional investment strategies. Every mutual fund invests in a different asset class and provides a different level of return. Mutual fund returns are market-linked, which means they are never guaranteed. However, this risk exposure provides an opportunity for wealth creation and growth. Ignorance about mutual funds designed in sync with the profile and risk appetite of senior citizens adds to frequent conundrums. 

Considering the idea behind investing in mutual funds is to earn decent returns without incurring unwarranted risk and not be bound to the investment for a prolonged period, say 10 years, senior citizens may as well start by putting some portion of their earnings in debt funds. Debt funds yield more returns than bank deposits including fixed and recurring deposits. Though one may argue that debt funds’ yield is similar to that of senior citizen saving schemes or post office deposit schemes, the tax benefits on the former warrant a higher internal rate of return (IRR), thus, benefiting the aged investors. Apart, senior citizens have the benefit of withdrawing money at their will, unlike most pension plans or products like the National Pension Scheme (NPS) that mandate withdrawal only after a specific tenure.

There is another benefit of parking money in debt funds, which is diversification. Mutual fund houses design portfolios to suit various asset classes. To start with, senior citizens can start by putting money in debt funds to meet their regular expenses. The remaining part of the money can be allocated to balanced mutual funds for a greater period, thus, earning the dual benefits of good returns and stability. Alternatively, they may lock their money through systematic investment plans (SIPs) in large-cap funds, thus, relieving them from extreme volatility owing to their investments in stocks of large-cap companies. However, different people invest for different reasons, which means that they must consider their financial goals, risk profile and investment tenure. Senior citizens enjoying enough liquidity for the coming decade can consider investing for the coming future. However, they must remember that they will benefit from the power of compounding only if they stay invested for an increasingly long tenure. 

Senior citizens must however remember that debt funds and debt-oriented hybrid funds’ investments held for less than three years are subject to short-term capital gains (STCG) tax and must therefore pay taxes according to their income 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 is enabling people to live longer than anticipated. Some biologists even anticipate that within a few generations, human life may outlive 100 years. It makes sense to plan ahead of time. Investing in a combination of senior citizens’ savings schemes and mutual funds will help many achieve financial independence even in the later years of their lives. 

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First Published: 18 Jan 2023, 08:03 AM IST

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