How to invest in mutual funds after you retire

How to invest in mutual funds after you retire

mutual funds after you retire are looking to invest in mutual funds these days. According to mutual fund companies and intermediaries, it is a testimony to the popularity of mutual funds.

However, retirees should be a little careful and do their homework before getting into mutual funds. A little homework is a must even before approaching an investment expert or mutual fund adviser, as the risk tolerance is typically very low among retired folks. Here is a simple primer for retirees looking to invest in mutual funds.

Looking for guaranteed returns?

Most of these retired individuals are first-time investors in mutual funds. They are used to bank and company deposits which guarantee returns. Such individuals should note that mutual funds do not guarantee any returns. Mutual fund returns are entirely dependent on the performance of the investments made by them. So, if you are looking for guaranteed returns, do not invest in mutual funds. It is better to stick to your bank deposits.

You should focus extra on this point if you do not have a regular pension from your employer, and look to generate a regular income to take care of your living expenses. It is better to bank on avenues like Senior Citizen Savings Scheme or Monthly Income Scheme from a post office to generate a primary income.

These schemes are backed by the government and they offer guaranteed returns for a certain period. You can bank on mutual funds to generate extra income for your discretionary expenses. This means individuals with the regular pension from the employer can go ahead with their investments just like any other investors. However, even they should proceed only if they are ready to take a risk.

Risky, did you say?

Did we spook you? Okay, every mutual fund has some element of risk in it. But the degree of risk varies. For example, some debt
schemes have a very small element of risk in them. However, some equity schemes can be extremely risky. They can also get extremely volatile at times. You can overcome this issue to a certain extent if you choose your investments based on your goals, horizon and risk profile. You should also stick to your investment objective irrespective of the market conditions.

As a rule, you should stick to safer avenues to meet your short-term goals because you cannot recover any losses when you have a very little time in hand. Debt funds have relatively less risk. Still, it is essential to choose a debt scheme based on your investment horizon. It will help you to bring down the risk to a great extent.

You should choose equity schemes only if you have a long investment horizon. A long horizon would help you to weather volatility and risk associated with stocks. When you have time in hand, you can hold on to your investments to recoup your losses. Also, a power of compounding would help you to amass wealth over a long period.

A few quick-fix solutions

Many retired folks are not comfortable with a lot of exposure to equity. However, they still want extra returns. Such folks should take a look at debt-oriented hybrid schemes. These schemes invest in a mix of debt and equity. They invest mostly in debt instruments but take a small exposure to equity to enhance returns. However, the equity component changes with the scheme to scheme.

Choose a scheme based on your risk tolerance level. If you want to avoid too much equity, opt for a scheme with a small equity exposure.Many retirees are lapping up balanced schemes or equity-oriented hybrid schemes these days. These schemes invest in a mix of equity (minimum 65 percent) and debt. They are relatively less volatile than pure equity schemes that invest the entire corpus in stocks.

However, they are not risk-free, as some advisers claim these days. A scheme that invests 65 percent of the corpus in equity cannot be entirely risk-free. You should invest in these schemes with a minimum five years in mind.

Many retirees are investing in balanced schemes with the intention of drawing regular dividends. However, such individuals should keep in mind that though some of these schemes have the excellent record of declaring dividends, they cannot take it for granted. Mutual fund schemes will declare dividends only if they are making profits. Otherwise, they would skip dividends.

If you have a pension or you have made provisions to take care of your living expenses, you can even invest in pure equity schemes like large-cap schemes and multi cap schemes to create wealth. However, invest with a firm plan. Do not get swayed by the market volatility.

Stick to your long-term plan to create wealth.

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