Should a retired person invest in mutual funds? What kind of funds should one choose?
-Deepak Sati
Mutual funds are recommended for people across age groups. However, the most important factors to consider while choosing suitable investment options are your financial goals and how far in time are they. We can provide you a broad framework to choose the right options.
1. Emergency fund: Before you think of investing, you must earmark at least 6 months of your living expenses and put it in a savings bank account to meet any unforeseen contingencies.
2. Money needed in the next six months: Money required for any planned expenditures in the next 6 months or so should again be parked in your savings bank account or in a fixed deposit.
3. Money needed in the next 1-5 years: Debt mutual funds are a suitable option for this timeframe.
4. Money needed after 5 years: Any money that you don't need for the next five years or more can be invested in balanced funds or diversified equity funds.
This way, you can match your investment horizon with suitable investments for that duration, without exposing yourself to unnecessary risk. And as the time passes, keep shifting the money into investments suitable for the remaining duration. For example, let's say a person has earmarked some money for his daughter's higher education, which is 10 years away. He should invest it in equity funds. But as the time passes and the goal is only 3 years away, he should move that money into debt funds. And once it is only about 6 months away, he should move that money into his bank account.
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