One of my neighbours who is 70 and retired from government service, asked for investment advice. The recent Pay Commission, he said, would increase his monthly income quite substantially. So could I recommend equity funds in which he could do SIPs?
My first impulse was to discourage him thoroughly from the idea, with the warning that equity funds are risky and that he could suffer capital losses if markets tanked.
But he countered this quite effectively - "My pension is already well in excess of my requirements and I even manage to save 30-35 per cent of it. So why do you presume that I can't take risks just because I am retired? I too would like to earn higher returns."
He has a point there. When giving financial advice, it is quite tempting to go by the textbook and stereotype investors based on their age.
'Avoid equities if you're above 60 and retired from service.' 'Take on high equity allocations if you're in your twenties.' But if we really think about it, the decision to allocate to equity funds should depend on many other factors, besides age. Therefore, there are three circumstances in which equity funds may actually be a good fit for 60-plus investors.
The big savers
They may not flaunt it, but many sixty-plus investors who have retired are in reality far more well off than twenty-somethings who earn big pay packets. For one, they may be earning an inflation-adjusted pension because they spent a long career with the government, a public sector bank or institution. Two, they may lead fairly frugal lives (no online shopping or foreign vacations!) and may thus save a sizeable portion of their income. With children well settled and no dependents to look after, such individuals may actually have far more disposable income post retirement, than they did during their career.
Or three, they may have planned their finances very well during their working lives and may continue to take up work after their official retirement, which leaves them with a healthy income stream.
Equity funds can indeed be a good addition to these investors' portfolios because of their potential to deliver a kicker to their income in the long run. The tax-free status of equity fund returns, after one year, while all debt investments get taxed to the hilt, only strengthens this case.
After all, given the rising longevity of us Indians, most of us need to plan for retired lives that are almost as long as our working lives. That makes it necessary for our post retirement portfolios to beat inflation too.
The wealth accumulators
Two, there are the set of investors who have enough and more assets to see them through retirement, and would like to accumulate wealth to bequeath to their children. Western models of financial planning often assume that parents have little interest in supporting their children. But Indian parents tend to think quite differently about this. Such investors would indeed be interested in creating 10 or 20-year portfolios even in their sixties or seventies that beat inflation and leave them with a respectable kitty to hand over to their children.
While making financial plans for such seniors, therefore, it would be essential to make sure that their investments don't just protect their capital, but also help them accumulate a healthy corpus at the end of their lifetime. Equity funds would be a great fit in such cases too, with the provisio that investors should invest only their surpluses, over and above their own living expenses, medical and emergency needs, to leave to their children.
They have the mindset
Often the main thing that an investor needs to make money on equities, is the right mindset. He needs the conviction to stay invested over the long term and not to let emotions take over either during bear markets or bullish ones. It is not just young investors who have a monopoly on such a mindset. Older investors may have it in abundant measure too, especially if they have lived through a few market cycles.
Equity funds can be particularly good vehicle for older investors who understand that market volatility doesn't always equate to risk, and that the dreaded losses from equities often materialise only in the short run. The caveat here would be that the investor should not tap into his equity kitty over the next 5 years.
Of course, there are obvious caveats before older investors can add equity funds to their portfolio. Sixty-plus investors certainly shouldn't invest in equity funds
a) if they will depend on the equity funds to meet their monthly expenses
b) if they expect to withdraw the money within the next five years
c) if they are risk-averse by nature and would lose sleep over every blip in the Sensex, even if they don't need the money
But then, all of the above apply to twenty-somethings too!
p>This story first appeared in November 2015.This article was originally published on June 30, 2016.
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