There is a famous saying in financial management that “any investment made should be appropriate for your age,” the same applies to invest in mutual funds. When you are at a young age, you can invest in high risk and volatile mutual funds with high potential for growth and returns, as time is on your side to make up for any losses over time. But the exact opposite is true, as you move towards your retirement age. Considering the short-term horizon, mutual funds for senior citizens in India require a more conservative approach
Investments performed by senior citizens are traditionally in fixed deposits and various other government fixed income schemes. The primary objective of investment by a senior citizen is capital preservation with a fixed, regular monthly income to manage regular expenses. Therefore, investment is known as low risk, moderate returns and moderate to high liquidity.
Various mutual funds fall under the above objectives category. Debt, balanced and liquid mutual funds are the main categories that serve these purposes. For a senior citizen, 70-75% of the investment should be in debt schemes and the rest in equity schemes. There may be some variation in this percentage depending on the investor’s risk appetite and long-term goals. Also, the investor should prioritize the dividend plan over a growth plan so there is a continuous flow of income from the fund in the form of dividends.
If the investor has an investment duration of more than three years and the investor can take moderate to high risk, then it is perfectly okay to invest in equity mutual funds. A large-cap fund would be suitable for seniors citizens because they are less risky than other equity mutual funds, provide returns to the range of 15–18 percent, and are less likely to erode capital. These funds also help to beat general inflation in the economy.
Debt funds are best suited for senior citizens to invest their surplus funds to earn better returns than very low-risk general saving accounts or bank FDs. A debt fund is a mutual fund that invests in fixed income instruments such as treasury bills, corporate bonds, government bonds (both state and central), bank bonds, certificates of deposit; both fixed deposits (FDs) and debt mutual funds are low-risk investment financial instruments and are used as comparable investment options.
Major Indian banks have revised interest rates on FDs in both the public and private sectors. The country’s largest lender, State Bank of India (SBI), lowered its interest rate on FDs to 6.90 percent over a 1-year maturity period and to 6.50 percent over a 3 to 10-year maturity period, which is now the industries lowest. In contrast, annual returns on debt mutual funds are around 9–11 percent. Also, no deduction or TDS on earnings from debt funds. In such a scenario, a wise investment is to park your surplus cash in debt mutual funds for senior citizens in India.