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How Senior Citizens Can Save & Invest Better With Mutual funds

Adhil Shetty

Mutual funds can provide safety of capital, good returns, tax-efficiency, and easy liquidation. Here’s how. 

Money management for senior citizens is a challenging matter. In retirement, when your bread-winning days are behind you, you’re often looking to keep your life’s earnings safe while generating an assured, moderate rate of return. Not a lot of investment instruments are suited to such a requirement.

Annuity plans offer assured pension but many find their low rates of return unappetizing. Fixed deposits keep your money safe but aren’t tax-efficient. Many instruments have lock-in periods, which curtails access to your own money. What a conservative investor need is an instrument that keeps his money safe, provides decent returns, is tax-efficient, and can be liquidated without any trouble. Fortunately, we do have such instruments: Mutual Funds.

For Safety, Choose Liquid Funds Or Short-Term Debt Mutual Funds

If you wish to enjoy higher returns than fixed deposits and bank savings account, these mutual fund categories can be your go-to option for the short term – which we can classify as a period of 0 to 36 months. Liquid mutual funds and short-term debt mutual funds invest your money in money market instruments, certificates of deposits, treasury bills, commercial papers, fixed deposits, and corporate debt. In liquid funds, the underlying securities typically have a maturity period of 91 days. Short-term funds also have securities with maturity periods ranging between six months and four years. Liquid mutual funds are the safest fund category.

Longer Than 36 Months? Pick Equity Funds

If you wish to keep your money locked in for longer than three years, we would recommend you put it in an equity mutual fund. These funds invest your money in the equity market, earning market-linked returns from stocks. In the long term, the stock market has outperformed returns from small savings schemes, fixed deposits, and gold. Equity investments carry high risks. However, three years is sufficient for you to recover from most market ups and downs and also earn handsome returns. For best returns, you may want to want to invest small sums over a long period instead of a one-shot lump sum.

Redeem Your Funds Any Time

In a liquid mutual fund, your investment can be redeemed in a day. There’s no lock-in or exit load. You have the option of pulling out your funds at any point in time. With an equity fund as well, you can redeem your money at any point. However, for investments whose tenure is less than one year, there may be an exit load of 1%. Before you redeem any mutual fund investment, always ascertain your exit load and reduce your costs.

With Liquid Funds, Your Earnings Are Tax-Efficient

Your mutual fund investments are more tax-efficient than most other investment options. If you invest in any variety of debt mutual funds (including liquid funds), you pay taxes on Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). The former is paid at your slab rate. The latter is paid on investments held for three years or longer at a rate of 20.6% with indexation benefit. Let’s understand this with an example.

Let’s say you invested Rs. 100,000 in a fixed deposit at 8% for five years in 2011-12. You also invested Rs. 100,000 in a liquid mutual fund with a CAGR of 8% for five years, also in 2011-12. Let’s also assume you’re in the 30% bracket.

After five years, your FD returns would effectively be 5.6% (after 30% taxation). And your deposit would effectively be worth Rs. 131,316 after five years.

In comparison, the debt fund would be at Rs. 146,932.80 after five years when you withdraw it. With indexation benefit, you can find the inflation-adjusted value of your purchase with the formula (Cost Inflation Index for the year of sale/CII for the year of purchase) X (Cost of purchase). The CII index for 2011-12 and 2016-17 are 184 and 264 respectively. Therefore your indexed cost of purchase (264/184) X 100,000 = Rs. 143,478. Therefore, your LTCG is (Rs. 146,932.80 – Rs. 143,478) = Rs. 3453. On this, your LTCG tax at 20.6% is just Rs. 711. This compares favourably to the nearly Rs. 16,000 you had to pay as taxes on your FD.

In Equity Funds, Your Earnings Could Be Tax-Free!

Equity mutual funds are not just attractive from the point of view of returns, they’re also incredibly tax-efficient. There is no LTCG on equity investments, with “long-term” being just one year. Therefore, any returns earned on equity fund units held longer than one year are completely tax-free. In the last 12 months, several equity funds have returned between 30-50%. These returns are now tax-free!

Cost Of Mutual Fund Investments

When investing in any mutual fund, consider its exit load and expense ratio. Mutual fund agents are paid a fee to sell regular funds which are expensed to you, the buyer. Full-disclosure marketplaces like BankBazaar also make a small fee but build you a basket of good high performing funds to invest in and also provide you with a daily NAV tracking dashboard in return for the fee. If you are a smart investor and know your way around mutual funds, always go for a direct plan, enjoy a lower expense ratio, but remember that you’ll be at the risk of buying the wrong fund.

Investing in mutual funds, be it for the short term or the long term, often provides better benefits than most other forms of investment. In retirement, mutual funds can provide senior citizens safety of capital, tax efficiency, and easy withdrawal.

BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for Credit Card, Personal Loan, Home Loan, Car Loan, and insurance. 

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