Financial Planning for Sr. Citizens

Volatile markets & falling interest rates,
where to get shelter?

Hybrid Equity Funds may be an answer.

            by Rajeev Pathak

Photo courtesy by Mikhail Nilov in Pexels                                                    

In this post, we are going to discuss the need for Financial Planning for Senior Citizens. It has become necessary as interest rates are falling continuously. So where to invest when equity markets are highly volatile. 

In recent times, all markets whether its equity, crude, or gold have shown a higher level of volatility. For example, BSE SENSEX has undergone a change of 1500-1800 points on either side in a single session during the last few months. The same is the case with Gold and crude oil prices. 

On the other hand, interest rates have declined substantially and this has disrupted the Retirement Planning of many of our senior friends. The fall in interest rate is so much that monthly interest income has been reduced by more than 25% in many cases. This shortfall in earnings has given a big setback to people who are dependent on interest income for livelihood. 

The declining Rate of interest is not the only culprit, sudden price-rise of essentials like vegetables, pulses, and sugar, administered price-rise due to increased GST load, withdrawal/surrender of subsidy on essentials like LPG, deregulated prices of petroleum products have further added to miseries of salaried, pensioners, and others.

Objectives:

People are just in a dilemma where to invest their whole life savings. In the given scenario, it has become all the most necessary that we find out some new avenues to invest our hard-earned money of whole life. While making a study  on the subject, the following parameters have been kept in  mind:

•                              Safety of funds
•                              Beating the inflation
•                              Capital appreciation  over the long run
•                              Adequate liquidity
•                                     Tax efficiency.

Considering the above objectives, I have examined several financial products and came to the conclusion that Hybrid: Asset Allocation Funds or Balanced Funds may fulfill my selection criteria. Now, let us discuss how and why.

Hybrid Equity Fund:

Hybrid Equity Funds are categorized under Hybrid: Dynamic Asset Allocation Funds, popularly known as  Balanced Funds.  As the name suggests, they invest in a combination of Equity, Bonds, and in some cases in Money Market instruments. The equity component may range from 60%-85% of total portfolio, depending upon the investment philosophy of a particular fund, and prevailing market conditions, but the exposure limit to equity is pre-determined. While the equity component provides high growth opportunities, the bond component protects the returns from any downside and volatility. A high rate of dividends from blue-chip companies and fixed income from bonds component help the fund to generate regular distributable returns. Both these components also help the fund to appreciate. 

A hedge over inflation:

As the major component is invested in equity, it takes care of rising inflation. It is proved time and again that equity is the only asset class that can beat inflation in long term.  Investors who have dual investment objectives may prefer these funds. Particularly retirees, pensioners, senior citizens or even investors with lower risk appetite may like to invest in these funds for growth that outpaces inflation and income that supplements current needs. While retirees generally scale back risk as age advances, many individuals recognize the need for equity exposure as life expectancy increases. Equity investment prevents erosion of purchasing capacity and ensures the preservation of retirement corpus in long run.

Liquidity:

With the emergence of technology and online platform, investment can be redeemed with a lot of ease and the amount gets credited within T+ 4 days. Thus, the liquidity aspect is taken care.  After creating a corpus through SIP (Systematic Investment Plan) over the years or investing a lump-sum amount after retirement, one can also choose an SWP (Systematic Withdrawal Plan) to meet with monthly living expenses.

Tax-treatment:

Photo by Nataliya Vaitkevich from Pexels

Interest income from Fixed Deposits is taxed at a normal rate. In the case of mutual funds Dividend income from equity-oriented mutual fund schemes is tax-free up to the financial year 2019-20, however, in the latest budget presented on 01.02.2020, dividend income from equity shares and mutual funds are also to be taxed from the financial year 2020-21. On redemption, income from mutual funds is treated as Short Term or Long Term Capital Gains. In the case of equity-oriented mutual fund schemes,  any profit made on redemption within one year is treated as Short Term Capital Gain (STCG) and taxed accordingly. If redemption is made after one year, profits beyond one lac rupees are treated as Long Term Capital Gain (LTCG)  and eligible for grandfathering and cost indexation benefits.

Conclusion:

It may be observed from above that Hybrid: Dynamic Asset Allocation --Equity Funds may meet our expectations. These funds provide us adequate safety against market volatility, protection from rising inflation, easy redemption, and also tax efficiency up to a certain extent. 

Though past performance of any mutual fund scheme is not a guarantee for the future, yet there are several funds that have given a CAGR  return in the range of 10-15% or even more for a 10 years period and there are laggards as well. The suitability of a mutual fund scheme for an individual depends on many factors like his / her age, investment horizon, financial goal, and its cost at a future date, risk appetite, etc. Therefore, investors will be well-advised to consult their Financial Adviser. They may also raise their queries, views, or requests for any assistance in the Comment Box for more details or for a customized solution. 

Related articles by the author,

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How to generate a Common Account Statement for all your mutual fund holdings?

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not be sustained in the future. 

Contact: boirajeev@gmail.com