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Should seniors invest in mutual funds?

We often hear about mutual fund investments and the risks associated with putting money in them. Considering how most mutual funds invest in the market, seniors often hold back from investing in them. The fallout from market volatility of late has caused many investors to suffer unwanted losses, raising more questions about whether seniors 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 a proper corpus but also fight inflation.

The key to success is making your money work for you, no matter your age. Since age is a major limitation for seniors, it is imperative that they invest wisely. There are a variety of investment options available to seniors. However, what works for one investor may not work for another. Many people misinterpret mutual funds as too risky for senior investors. This has caused many of them to opt for other investment options.

However, mutual funds are advantageous for seniors and can be a valuable investment option. Although markets are susceptible to short-term shocks, the mechanisms used here have produced 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 tied to the market, which means they are never guaranteed. However, this risk exposure provides an opportunity for wealth creation and growth. Ignorance about mutual funds tailored to the profile and risk appetite of seniors adds to the frequent conundrums.

Considering that the idea behind investing in mutual funds is to earn decent returns without incurring unreasonable risk and not being tied to the investment for a long period of time, say 10 years, seniors can also start by putting a portion of their earnings into debt funds. Debt funds generate more returns than bank deposits, including fixed and recurring deposits. Although it can be argued that the performance of debt funds is similar to that of senior savings plans or post office deposit plans, the tax benefits of the former guarantee an internal rate of return ( IRR) ​​higher, which benefits older investors. Additionally, seniors have the benefit of withdrawing money at will, unlike most pension plans or products like the National Pension Plan (NPS) which require withdrawal only after a specified tenure.

There is another benefit of parking money in debt funds, which is diversification. Mutual fund houses design portfolios to fit various asset classes. For starters, seniors can begin by putting money into debt funds to cover their regular expenses. The remaining part of the money can be put into balanced mutual funds for a longer period, thus getting the double benefit of good returns and stability. Alternatively, they can lock in their money through systematic investment plans (SIPs) in large-cap funds, thereby relieving them of extreme volatility due to their investments in large-cap company shares. However, different people invest for different reasons, which means they need to consider their financial objectives, risk profile, and duration of the investment. Seniors who enjoy sufficient liquidity for the next decade may want to consider investing for the near future. However, they should remember that they will benefit from the power of compounding only if they remain invested for an increasingly longer holding.

However, seniors should remember that investments from debt funds and debt-oriented hybrid funds held for less than three years are subject to Short-Term Capital Gains Tax (STCG) and therefore , they must pay taxes according to their level of income tax. Redeemed investments are treated as long-term capital gains (LTCG) if the gains are realized after holding them for at least three years. After indexing, LTCG is taxed at 20 percent.

Science is allowing people to live longer than anticipated. Some biologists even anticipate that within a few generations, human life can survive 100 years. It makes sense to plan ahead. Investing in a combination of senior savings plans and mutual funds will help many achieve financial independence even in the later years of their lives.

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First post: January 18, 2023, 08:03 am IS

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