Should seniors invest in mutual funds?

Often we hear about investing in mutual funds and the risks associated with putting money into them. Considering how most mutual funds invest in the market, seniors often shy away from investing in them. The aftermath of recent market volatility has caused many investors to take unwanted losses, raising more questions about whether seniors should invest in mutual funds. The idea behind allocating a portion of your income to mutual funds is to earn returns that not only help you build an adequate corpus, but also beat inflation.

The key to success is to make your money work for you, no matter your age. Since age is a major constraint for seniors, it is imperative that they invest wisely. There are various investment options for 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 led many of them to opt for other investment options.

However, mutual funds are beneficial for the elderly and can be a worthwhile investment option. Despite the fact that markets are sensitive 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 offers a different level of return. Mutual fund returns are market-bound, meaning they are never guaranteed. However, this risk exposure offers opportunities for wealth creation and growth. Ignorance of mutual funds designed in accordance with seniors’ profile and risk appetite contributes to frequent conundrums.

Given the idea behind investing in mutual funds is to get a decent return without taking on unjustified risks and not be tied to the investment for an extended period of time, say 10 years, seniors might as well start with some of their putting income into debt funds. Debt funds yield more returns than bank deposits, including fixed and recurring deposits. While it could be argued that the returns of debt funds are comparable to those of senior savings programs or post office deposits, the tax benefits on the former justify a higher internal rate of return (IRR), which benefits senior investors. In addition, seniors have the advantage of being able to withdraw at their own discretion, unlike most pension plans or products such as the National Pension Scheme (NPS) that only mandate withdrawals after a certain term of office.

There is another advantage of parking money in debt funds, which is diversification. Mutual funds design portfolios to suit different asset classes. For starters, seniors can start putting money into debt funds to cover their regular expenses. The remaining portion of the money can be allocated to balanced mutual funds for an extended period of time, earning the dual benefits of good returns and stability. Alternatively, they can lock their money into large-cap funds through systematic investment plans (SIPs), relieving them of extreme volatility resulting from their investments in large-cap company stocks. However, different people invest for different reasons, which means they should consider their financial objectives, risk profile and investment period. Seniors who have enough liquidity for the next decade can consider investing for the coming future. However, they should remember that they will only benefit from the power of compound investments if they remain invested for an increasingly long period of time.

However, seniors should note that investments of debt funds and debt-oriented hybrid funds held for less than three years are subject to short-term capital gains tax (STCG) and therefore must pay tax according to their tax rate. Returned investments are treated as long-term capital gains (LTCG) if the gains are realized after they have been held for at least three years. After indexation, LTCG is taxed at 20 percent.

Science enables people to live longer than expected. Some biologists even expect human life to survive 100 years within a few generations. It is wise to plan in advance. By investing in a combination of senior savings programs and mutual funds, many will achieve financial independence even in the later years of their lives.

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