December 06, 2017
The fixed deposit rates are coming down. The interest rates on post office small savings schemes are being revised downwards by the government as the interest rates continue to fall.
Senior citizens who rely on these deposits and savings schemes for regular income are already feeling the pinch. The rising costs of day to day living and aspiration to lead a better life coupled with reduced regular income are only going to make matters discomforting to the elderly.
What we can do?
The middle aged and young are investing their savings in debt, balanced and equity mutual funds to create wealth for themselves. It is high time that they also consider sharing their experience and worthiness of investing in mutual funds with their parents and guide and help them not only to beat inflation but also in creating surplus to meet their unforeseen needs and unfulfilled desires.
Mutual Funds for Parents? Seriously?
As you read this, the argument may come to your mind about your parents being risk averse, who do not want to invest in equity mutual funds or in any mutual fund for that matter. You may believe that they shall stick to only bank FDs as far as their investments are concerned. Therefore, I mention here the topic of this article. It is our onus to educate them (and not to force them) about various risk averse/low risk investment options available where they can invest their money and continue enjoying regular income at a much higher rate.
A well diversified mutual fund portfolio comprising Debt funds, Equity Income funds and Balanced funds with appropriate allocation can continue to generate much higher regular income for senior citizens at almost negligible or low risk.
Let’s have an understanding of three kinds of fund mentioned above.
Term Debt Funds: These funds invest in government securities, corporate bonds, bank CDs and money market instruments to generate consistent and safe returns. These funds do not invest in stock market therefore not risky like equity funds. Expected returns from these funds is around 8% per annum if investment is made for one year and more.
Equity Income Funds: These funds invest 80-85% of the money in fixed income instruments like government bonds, corporate bonds, money market instruments and arbitrage. This 80-85% investment makes consistent and safe returns. The balance 15-20% of the money is invested in stocks to generate slightly higher, tax-free returns. The expected returns from equity income funds are 9-10% over an investment period of two years and more.
Balanced Funds: These funds invest 65% money in stocks and 35% in fixed income instruments. These funds tend to be volatile in comparison to debt funds or equity income funds. However, a small proportion invested in these funds does not pose too much risk to the portfolio, and has a potential to earn a healthy tax free return of 12-14% over a three year period or more.
A Model Solution
(On an investment of Rs. 10 Lakhs)
|Fund Category||% Allocation||Amount Allocated||Rate of Return||Yearly Income|
|Equity Income Fund||40%||4,00,000||10%||40,000|
The above illustration is a model solution for understanding purpose. We suggest investors to discuss their profile and needs with their financial advisor to design a personalised portfolio with appropriate asset allocation.
The elderly who rely solely on fixed income products for regular income can invest in Debt, Equity Income and Balanced funds to generate higher, tax efficient income. It is our responsibility to educate them about the various options available and let them start with limited exposure. Once they gain confidence in these investments, a higher allocation to mutual funds can be made. Speak to your financial advisor and get the right asset allocation mix specifically for your parents’ needs.
As always, your views and feedback on the above are welcome.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org .