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Should Senior Citizens Invest in Mutual Funds?

Looking to understand the risk of senior citizens investing in mutual funds? Read this article to know safe and risk free mutual fund options senior citizens can invest in.
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In India, on one hand, many people aspire to retire early, and on the other hand, life expectancy is steadily increasing. Most people will need their retirement fund to last a good 25-30 years in such a scenario. This article focuses on whether senior citizens should invest in mutual funds. What should be the strategy?

A case for senior citizens to invest in mutual funds

Let us elaborate on the two points of higher life expectancy and early retirement to understand whether there is a case for senior citizens to invest in mutual funds.

  • Increasing life expectancy - With the advancements in medical science, life expectancy has increased in the last few years and is expected to increase further. According to some reports, the current life expectancy in India is 71 years. By the time the current generation retires, the life expectancy may increase to 75-80 years.
  • Financial Independence Retire Early (FIRE) - Many people have become Financial Independence and Retire Early (FIRE) aspirants and aim to retire early, much before the usual retirement age of 60 years.
  • Low-interest rates and high inflation - In India, the current interest rates are one of the lowest seen in the last decade. In the developed world, interest rates are near zero or negative. India may also be headed in that direction in the future. Currently, inflation is high. So, even if the fixed-income products' interest rates are positive, the high inflation rate makes the real returns low or negative.

So keeping in mind the combination of early retirement and increasing life expectancy, most people will need their retirement fund to last a good 25-30 years. But, with high inflation and low-interest rates, will your retirement fund last that long? Hence, senior citizens may consider investing a small portion (10-15%) of their retirement fund in mutual funds.

Asset allocation for senior citizens

Equity mutual funds have the potential to give inflation-beating high returns. To sustain their retirement funds for a longer tenure, senior citizens can consider investing a small portion of their retirement portfolio in equity mutual funds for the long term.

Senior citizens should follow appropriate asset allocation and spread their investment in various asset classes such as:

  1. Fixed income products: The maximum portion of the retirement fund should be invested in fixed income products such as:
    • Debt mutual funds for capital protection and a systematic withdrawal plan (SWP) for regular monthly income
    • Senior Citizens Savings Scheme (SCSS) for tax benefits under Section 80C, good returns, and regular quarterly income
    • Pradhan Mantri Vaya Vandana Yojana (PMVVY) for capital protection, good returns, and monthly pension
    • Post Office Monthly Income Scheme (POMIS) for capital protection and monthly income
  2. REITs and InvITs - Senior citizens can invest a small portion of their retirement portfolio in real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs). These instruments pay a quarterly dividend and can also give capital appreciation.
  3. Gold sovereign bonds (SGBs) - A small part of the retirement portfolio can be invested in sovereign gold bonds (SGBs). Gold is generally considered to be a hedge against high inflation. Also, gold does well during times of economic uncertainty. SGBs give exposure to gold in electronic format. They pay a 2.5% interest rate p.a. (paid semi-annually). The long-term capital gains tax is exempt if redeemed on maturity with the RBI.
  4. Equity mutual funds - Finally, a small part of the retirement portfolio should be invested in equity mutual funds for the long term. You can choose a mix of index funds and balanced funds within equity funds. Due to the high risk and volatility involved, senior citizens may avoid investing in mid-cap, small-cap, sector and thematic funds. Equity mutual funds have the potential to give inflation-beating high returns and make your retirement portfolio last for a longer duration

In the earlier section, we understood how senior citizens should allocate and invest a small portion of their retirement funds in equity mutual funds. Now, let us understand how senior citizens can consider investing their entire retirement fund using the three-bucket strategy.

Three-bucket strategy for investing in a retirement fund

Senior citizens may consider adopting the three-bucket strategy for investing in their retirement fund. Harold Evensky came up with the three-bucket retirement investing strategy. As per this strategy, you should bifurcate your retirement fund into the following three buckets:

BucketPurpose
Immediate bucketThe investor should allocate an amount in this bucket that will meet the expenses for the immediate two years of retirement.
Intermediate bucketThe investor should allocate an amount in this bucket that will meet the expenses for years three to ten of retirement.
Long-term bucketThe investor should allocate an amount in this bucket that will meet the expenses for beyond ten years of retirement.

Let us see how each of these buckets works.

  1. Immediate bucket

    In this bucket, the retiree can maintain an amount required to meet the expenses for the next two years. The amount can be invested in fixed income instruments that have liquidity and give a monthly income. The individual may consider investing 65-70% of the retirement corpus in the immediate bucket.

    The amount can be invested in monthly income instruments such as:
    • Post Office Monthly Income Scheme (POMIS) that pays monthly interest, 
    • Pradhan Mantri Vaya Vandana Yojana (PMVVY) that pays monthly pension, 
      Debt mutual funds such as liquid funds, low duration funds, or money market mutual funds with a monthly systematic withdrawal plan (SWP)
  2. Intermediate bucket

    In this bucket, the retiree can maintain an amount that will be required to meet the expenses for the next three to ten years. The individual may consider investing 15-20% of the retirement corpus in the intermediate bucket. The amount can be invested in financial products such as:
    • Senior Citizens Savings Scheme (SCSS) that gives quarterly interest and tax benefits under Section 80C at the time of investment
    • Real estate investment trusts (REITs) and infrastructural investment trusts (InvITs) give quarterly dividends. They also have the potential to give capital appreciation.
    • Sovereign Gold Bonds (SGBs) that pay 2.5% interest p.a. (payable every six months). They track the price of gold and have the potential to give capital gains in the long term.
    • Public Provident Fund (PPF) gives tax benefits at the time of investment under Section 80C and tax-free maturity proceeds. You should ensure the PPF account has completed its tenure of 15 years by retirement. When you continue your PPF after 15 years, it becomes liquid and allows one withdrawal a year.
    • Conservative hybrid mutual funds where the debt component is on the higher side (65% or higher).
  3. Long-term bucket

    In this bucket, the retiree can maintain an amount that will be required beyond ten years. The individual may consider investing 10-15% of the retirement corpus in the long-term bucket. The amount can be invested in financial products such as:
    • Balanced mutual funds where the equity component is higher than 65%. The investment time horizon should be longer to get the benefit of compounding.
    • Index funds invest in all the securities of the benchmark index, such as Nifty 50 or Nifty Next 50 Index, in proportion to their weightage in the index. They replicate the index performance and give index returns.
    • Credit risk mutual funds invest in bonds of companies with lower than highest credit rating. These funds have the potential to give good returns.

Annual review and rebalancing of buckets

At the start of every year, the senior citizen should sit with their financial advisor and review the three buckets.

  1. Replenishment of immediate bucket: From the available balance for two-year expenses, you would have used up the one-year amount for the previous year's expenses. So, the immediate bucket will have to be replenished with one-year expenses at the start of every year. You can use the interest, dividends, etc., received during the year for replenishment. If there is a shortfall, you may transfer the amount from the intermediate bucket.
  2. Replenishment and rebalancing of intermediate bucket: At the start of every year, you should check the asset allocation in the intermediate bucket. If a particular asset class has done exceedingly well, you may sell some units of that asset class and reinvest the proceeds in other asset classes so that the asset allocation reverts to the base. Also, if there is any shortfall in this bucket, you may transfer the amount from the long-term bucket.
  3. Rebalancing of long-term bucket: At the start of every year, you should check the asset allocation in the long-term bucket. If a particular asset class has done exceedingly well, you may sell some units of that asset class and reinvest the proceeds in other asset classes so that the asset allocation reverts to the base. If any new financial product has been introduced, you should check if you need to invest. If there is a need to exit an existing financial product, you should do the needful.

Senior citizens may consider investing a small portion of their portfolio in mutual funds

Senior citizens can allocate a small portion of their retirement corpus to equity mutual funds using the three-bucket investment strategy. In the long run, equity mutual funds have the potential to give inflation-beating high returns, which can help senior citizens sustain their overall retirement fund for a longer period.

Investing in mutual funds with the Glide Invest App

In the above section, we saw how retirees could invest their retirement fund using the three-bucket strategy with a small portion in equity mutual funds. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals.

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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