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Why mutual funds are better investment option for senior citizens?


Mutual funds (MFs) are a diversified investment pool under which investors money is parked in securities like stocks, bonds, ETFs, and debentures among others. They are linked to the market’s performance. One of the biggest advantages of mutual funds is that investors’ hard-earned money is managed by a professional fund manager. You can invest in mutual funds via a systematic investment plan (SIP) or a one-time lump sum option. Notably, MFs are seen as a flexible investment option for senior citizens. Not just that, MFs can help senior citizens hedge real returns and beat inflation.

Generally, senior citizens avoid investing in risk-related investment schemes. That’s because they’re already in their retirement days and cannot bear the losses and vulnerability that come with market-related instruments risk. They search for schemes that can offer guaranteed returns. In such cases, preference towards traditional schemes like Post Office savings option, banks fixed deposits, or even national pension schemes (NPS). However, what one forgets to understand is that MFs can in fact be opted as one of the vital investment options by elderlies due to their various benefits. Markets do witness short term shocks, however, in long-term, mechanisms here have given fruitful returns than compared to so-called traditional schemes. 

Nidhi Manchanda CFP at Fintoo said, “One should invest in mutual funds based on their risk appetite and investment tenure as there are different types of mutual funds catering to different investment needs.”

Explaining why MFs are better investment options for elderlies, Manchanda said, “Mutual funds give flexibility to the senior citizens to create their own withdrawal plan as Mutual funds broadly do not have restrictions on withdrawal in comparison to NPS or any other annuity product.”

Also, Mutual funds allow senior citizens to create a personalised diversified portfolio across asset classes suitable to their needs, she added.

Manchanda explained that senior citizens should park the money required for the first immediate 5 years in a Debt Mutual Fund. Money required for regular expenses in the next 5 years can be invested in Balanced Mutual Funds. And funds that will be required post 10 years can be invested in Equity Large Cap Funds. Having said that, it is suggested to consult a financial advisor who can suggest based on the risk appetite of the investor and other goals in the post-retirement period.

“Having some exposure to equity investment via equity mutual funds will help senior citizens to beat inflation on their overall portfolio,” Manchanda lastly said.

The interest rates earned in mutual funds are linked to market movement. However, since an investor’s portfolio is divided into a host of securities — MFs manage to hedge returns in volatile conditions.

As per AMFI data, the inflow in SIPs stood at 12,693 crore in August. Notably, the inflow has stayed above 12,000 mark in SIPs since May this year. In July, the investment in SIPs was at 12,139 crore.

In August, the overall mutual funds’ industry recorded a strong inflow of about 65,077.46 crore — growing by 2.75 times from 23,604.92 crore in the previous month. While debt-oriented schemes were the best performers with an inflow of 49,164.29 crore compared to an inflow of merely 4,930.08 crore in July. However, investment in equity-oriented schemes dipped to 6,119.58 crore in August from 8,898.2 crore in July this year.

Overall, asset under management (AUM) grew at record 39,33,877.77 crore in August 2022 compared to 37,74,802.90 crore in July 2022.

Last month, AMFI highlighted that SIP is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund Scheme periodically at fixed intervals – say once a month instead of making a lump-sum investment. The SIP instalment amount could be as small as 500 per month. SIP is similar to a recurring deposit where you deposit a small /fixed amount every month.

Further, AMFI explained that SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time.

Currently, banks fixed deposits offer between over 3% to a little over 7% interest rates to senior citizens. While recently, the government has hiked the Post Office Senior Citizen Savings scheme interest rate to 7.6% with effect from October 1st. Meanwhile, an investor can earn between 9% to 12% in the National Pension Scheme (NPS).


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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