WEALTH MANAGEMENT FOR SENIOR CITIZENS – PART- III

[Dr. Sanjiv Agarwal]

Monthly income plans (MIPs) offered by mutual funds are debt-oriented funds that predominantly invest in debt instruments, along with a marginal equity component to deliver the necessary "kicker" to the overall returns. Income is provided on a monthly or quarterly basis. Mutual funds also provide a "growth" option for those who are not looking for regular income. The equity component in the portfolio can be anywhere from 0-25% of the NAV. Returns are not guaranteed and nor are the regularity of the payouts, although fund managers strive to mitigate the latter by taking a conservative approach to equity (defensive stocks) or limiting equity stocks to a minimum in the portfolio. Dividends are tax-free, although the fund house deducts a dividend distribution tax.

An MIP can provide superior returns (and regular income) relative to pure fixed ­income products during stock market boom years. However, the success of an MIP during recession and bear markets will largely depend on the track record of the fund management and the MIP mandate in terms of maximum allowable equity.

Having discussed the fixed income options, here are few other options available for investments.

Balanced funds offered by mutual funds are equity-oriented schemes that invest more than 65% of the corpus in equities. The rest are invested in debt and money market instruments. Senior citizens with a medium to long-term perspective can invest in balanced funds. While balanced funds do not offer regular income, dividends are tax-free (with zero dividend distribution tax) in the hands of the investor. Moreover, since this is an equity-oriented fund, long term capital gains in excess of one year is tax-free in the hands of the investor. A balanced fund enables to participate in the equity markets while, at the same time, lowering your downside risk through a sizable exposure in debt instruments.

Diversified equity fundsare funds that invest predominantly in equity. As risk is commensurate with return, these funds fall in the high-risk, high-return category. Equity smoothens out to offer the best returns in the long run and is an ideal long-term bet for beating inflation. Senior citizens should consider this investment category only from a long-term perspective. Select a diversified equity fund with a good three-year to five-year track record, and you can either make lumpsum investments or take the systematic investment plan (SIP) route.

Diversified equity funds can be categorized into large-cap funds, mid-cap funds, index funds and ELSS (equity-linked savings scheme). The benefit of investing in a diversified equity fund is that you needn't worry about buying, selling or tracking your equity investments; your professional fund manager will do that for you. Moreover; you can enroll in an SIP with a minimum monthly amount of only Rs500. That said, investment in diversified equity funds should be considered only when a person has defined a comfortable asset allocation for himself. The asset allocation should be aligned to your risk profile, and should depend on risk-taking ability, existing asset base, and spending requirements.

Gold, as a commodity, has been in the midst of a secular nine-year bull run. With the yellow metal becoming increasingly popular among investors, both during good and bad times, financial experts recommend an investment of at least 5% of overall portfolio in the precious metal.

This can be done through gold exchange traded funds (GETFs), the units of which can be purchased through your broker. GETFs are a play on international gold prices (London Gold), and there are six such GETFs available in the market today. One can also invest in gold in its physical form through purchase of bars, coins and jewellery.

So, as a senior citizen, what should be the appropriate investment mix? Well, to begin with, even among senior citizens, there is no one size that fits all. However, capital preservation should be one of the key objectives, albeit not the only one, while investing for the retirement years. Of course, that does not mean that one should stack up your portfolio with fixed­ income instruments. As Indians, this is what we have been doing for years without realizing the devastating impact of inflation and lifestyle changes that come back later to haunt us. As a result, over time, you actually end up becoming poorer as inflation begins to eat into the value of the nominal returns that you are earning through fixed-income just because you wanted to play safe and preserve capital.

In other words, there is a need to make a fine balance between capital preservation and appreciation. Define a comfortable asset allocation. For instance, if you are 60 years old, you can initially begin with a 60:40 or 70:30 or 80:20 asset allocation in favor of debt. The asset allocation should be a function of risk profile, and should depend on risk-taking ability, existing asset base, and spending requirements. The debt investments can be a mix of Senior Citizens Savings Scheme, NSC and post-office and mutual fund MIPs. The equity investments could be a mix of balanced and diversified equity schemes. On a regular basis, possibly once in two years, one may need to rebalance your portfolio to the pre-determined original asset allocation. Moreover, as you grow older, once in five years, you may have to redefine your desired asset allocation, thus raising the proportion of debt further in the portfolio.

(Concluded )

 

WEALTH MANAGEMENT FOR SENIOR CITIZENS - PART- I

WEALTH MANAGEMENT FOR SENIOR CITIZENS - PART- II

 

Discussions to this article

[DEV KUMAR KOTHARI]

Dear Dr. Sanjiv Agarwal,I APPRECIATE YOUR CONCERNS FOR ELDERLY PEOPLE AND THEIR PLANS FOR POST RETIREMENT PERIOD.Having gone through your three articles, I feel need of another article on investments covering hedging againstinflation,investment in house property for own use (with surplus space to let out or sell in case of need), property to let out to earn regular rental income, investments in reputed health service provider who offer discounts and free services to investors, suggestions to keep properties and investments in joint names (husband + wife) and nomination for children so that in case of death of any one the transmission is easy and after death of second one, children can claim PROPERTY AS NOMINEE. In case of need elderly person can avail reverse mortgage facility or can sell property without looking at children. Securing finance for post retirement period, savings must be started at early age. Having own house should be in preference over having motor car. In Bengal there is concept "aage bari tar por gaadi", means first buy a house and then go for car. This is very good concept, however, now-a-days fashion and concept are different and car is preferred instead of house. Another financial principal to be followed in personal life also is to keep recurring cost low, and for that at times you have capital, make investments to reduce your recurring costs like rent of premises or equipment, electricity expenses,interest on loans, motor car runni vacation costs by owning tie share in properties for vacation. Even for self made person having not much capital base ideally one should target to have own house by the age 35-40 years and another hosue or property to earn rent by age of 55 -60years. The nature and cost of houses or properties are adjustable as per capital base and recurring income. If capital is low and earning are low, in that case too one should plan these investments. Afterall, all are not equal and one has to keep up with his own means

[Dr. Sanjiv Agarwal]

Thank you a lot, Dear Kothari ji. Infact, there is no end to such writings and advices. What is more relevant and important is to follow these. All of us including ourselfs, tend to dviate in own cases. I fully endorse your views.