Are equity savings funds a safe bet for retirees?

Contrary to what many believe, retirees must allocate a small portion of their portfolio to equities. Ideally, it should be at least 30 to 40 per cent of the portfolio. Because that is how you will get inflation-adjusted returns or income over the long-term. Returns generated by fixed-income alone may not be sufficient to provide inflation-adjusted income throughout the retirement years unless you have a huge corpus in comparison to the income requirement. Ideally, the annual withdrawal should not exceed four to six per cent of the total corpus.

If you have parked some money in fixed deposits for the long-term, moving it to an equity savings fund would be a good idea. It will help you optimise returns. However, equity savings funds will be volatile, unlike fixed deposits, but they are not as volatile as pure equity funds. These are funds that invest 15-30 per cent into equity and the remaining in fixed income and arbitrage. The equity and arbitrage portion comprises a minimum of 65 per cent of the portfolio, making them viable for equity taxation. While equity savings funds are one relatively riskier avenue of investment, if you look at it from a fixed deposit time frame of three to five years, it is not that risky. But in the short run, it might look scary.

Also, ensure that you do not invest the whole amount in one go. It is always better to spread your investment over a period of time while investing in any equity-linked product. Depending on the scale of money, spread it between six months to three years. It will reduce the risk of investing at a market high and would average your cost of purchase.

Suggested watch: Are equity saving funds better than arbitrage funds for an SWP?

This article was originally published on April 29, 2022.