According to a special research report by the State Bank of India, Indian households invested Rs 29.7 trillion in financial assets in 2022-23. Of this, 33.4 per cent was held in bank deposits, 6 per cent in mutual funds and 0.9 per cent in stocks and debentures. Senior citizens held around 47 per cent of bank fixed deposits, according to the same report. Apart from fixed deposits, what other instruments should senior citizens consider while building their retirement portfolio?
One of the reasons why retirees rely so heavily on fixed deposits is the familiarity bias. “They will be familiar with bank deposits all their lives and are only now getting familiar with stocks and mutual funds. Also, after retirement, many people become more conservative than they were in their working years. They want predictability, which is what bank fixed deposits offer,” says Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors.
According to experts, a retirement portfolio should have three parts. “First, you should have enough money invested in liquid instruments to meet emergencies. Second, a part of the portfolio should work towards generating a regular, fixed income to meet monthly expenses. And third, a part of the money should be invested in growth assets to provide protection against inflation,” says Hemant Rustagi, CEO, Wiseinvest.
Generate a regular income
To meet the need for a fixed and regular return, senior citizens can invest in instruments such as fixed deposits, high-quality bonds, senior citizen savings schemes and post office monthly income schemes.
A portion of this segment of the portfolio can also be invested in life annuities. The interest rate on fixed-income instruments often changes once the term ends, subjecting the investor to reinvestment risk. In a life annuity, the buyer (and even his or her spouse, in a joint life annuity) receives the same payment throughout his or her life that was promised at the beginning.
“Annuities also protect the investor against the risk of living too long,” says Dhawan.
Growth assets to combat inflation
One of the main risks faced by seniors is inflation. “A pension fund that yields adequate returns at the beginning of retirement may no longer be sufficient after a few years, due to inflation. This could force the retiree to dip into his or her pension fund, meaning that the returns generated from it in the future would be even lower,” says Raghaw.
To protect against inflation, a portion of the portfolio should be invested in growth assets: equity mutual funds and hybrid funds.
“In terms of equity, seniors should orient their portfolios towards large-cap funds, preferably index funds. Hybrid funds invest in a mix of equity, debt and arbitrage. Investors can choose between equity savings, balanced advantage funds and aggressive hybrid funds, depending on their risk profile,” says Rustagi.
Mistakes to avoid
Many retirees underestimate the capital they will need after retirement. “They underestimate the impact of inflation, taxes, health-related expenses and the high premium they will have to pay for health insurance,” says Dhawan.
Many also lack an adequate emergency fund or adequate health insurance coverage, forcing them to dip into their retirement funds.
According to Raghaw, many investors fail to understand that investment returns can decline over time. For example, fixed-income returns can fall due to a secular decline in interest rates. Finally, taking on excessive risk out of desperation can also backfire.
· Illiquid product since it is difficult to withdraw the principal capital
· The rate of return is usually not very high (but improves with age)
First published: August 26, 2024 | 19:27 IS
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.