Mutual funds are not only helpful for building your wealth but as well as helpful in preserving, growing, and distributing your wealth in your golden years to make sure you live comfortably even if you stopped working for the money.
The main objective and requirements of retirees in retirement are to have a regular income, preserve capital as far as possible and earn inflation hedged returns to sustain their wealth in case of longer life span. Mutual funds fit all these requirements. It offers the facility of a Systematic Withdrawal Plan (SWP) which is helpful to get regular income. Frequency can be decided by the investors.
- For the first objective of getting regular income debt mutual funds are preferable.
- For the second objective of preserving capital and taking some calculated risk combination of debt mutual funds and hybrid funds are suitable and
- For earning inflation hedged returns in long run even retirees do not have any other options than equity mutual funds.
Investment in the equity asset class is always related to market risk. No one can predict what is going to happen tomorrow in the share market. But this doesn’t mean that this riskier asset class should be completely ignored by conservative investors or retirees. Because this is the only asset class which is having the potential to generate long-term inflation hedged returns.
Because of the current volatility, many retirees feel uncomfortable investing in equity MFs. But if they make decisions based on this short-term volatility then they end up eroding their wealth in the long term.
Even retirees should have equity asset class exposure in 15 to 30% of their overall portfolio or the investible surplus. Normally people say that allocation towards equity depends upon the age of the investor but actually, it depends on your current net worth and risk-taking ability based on your future need.
If a retiree is having 2X networth when his actual requirement is X then, he can invest other X in the equity asset class to build sizable wealth for living lavishly, doing charity, and transferring sizable wealth to the next generation.
So basically how much allocation you should do depends on your risk-taking ability but in any case, retirees should have a minimum of 20% of the portfolio in the equity asset class so that they can make sure that their retirement kitty is not eroding at the higher speed.
Allocation towards equity asset class is essential to make sure your later years of retirement go comfortably in a similar lifestyle that you have today. For long-term financial goals if any which are 10+ years away for that as well allocation of equity makes sense so that initial capital investment reduces.
That’s why even retirees should have investments in Nifty Index funds or large-cap funds and flexicap funds along with hybrid equity funds for the medium-term goals. But kindly do not venture into mid-cap and small-cap mutual funds.