#MutualFundKickstarter: Yes! Mutual Funds are Great for Retirees
Published On: 21-Jun-2018

You like the sound of the ping on your mobile phone informing when pay gets credited every month. But how can you ensure that the sweet sound continues even in retirement? You will still need a regular income to meet your regular expenses. That’s not all.

You also need to meet periodic expenses such as home repairs and maintenance, besides have lump sum requirements from time to time, especially during family events like marriages. That’s not to forget the needs for emergency cash due to possible health and other emergencies. How will you do all this and not let your retirement become all about managing money? The answer lies in investing in debt mutual funds.

By investing in different categories of debt mutual funds and using their various features, you can ensure that not only do you get regular retirement income, but also meet periodic expenses, lump sum requirements, besides meeting emergency needs. Debt funds can help your money grow well thanks to tax efficiency and capability to counter inflation. Remember, inflation quietly eats away the purchasing power of retirement savings.

Here, we will tell you how retirees can smartly use mutual funds. But before we do that, we will give you a financial big picture of retirement. This will help you appreciate the utility of debt mutual funds even better.


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Retirement Big Picture

From accumulator to harvester of investments

During your work life, you are an accumulator, investing regularly for retirement. However, in retirement, these investments need to be harvested to meet various needs be it for regular income, periodic expenses, lump sum requirements or emergency funds. It is important to appreciate this financial transition.

Balancing money’s easy access with its growth

As you manage your retirement savings, it is important to have relatively easy access to money parked in investments. This is essential to meet emergencies and sudden expenses. This involves investing in lower risk; lower return investments that typically provide broadly stable returns. This helps create regular income. At the same time, you also need to balance the requirement for money’s easy access with its growth. After all, you don’t want to run out of money. Mutual funds not only help you meet these financial challenges but also help you combat four significant financial risks.

Financial Risks in Retirement

Investment risks

In retirement, most retirees tend to invest in lower risk investments for stable returns and regular income. However, these investments can be impacted by risks like unfavourable changes in interest rates or default in repayment of invested money.

Outliving retirement savings

A monthly budget of Rs 30,000 on retirement at age 58, will need to double in 15 years i.e. at age 73, if average inflation rate in the 15 years is 5%. This simply means that your retirement savings needs to keep growing at a healthy clip so that you don’t run out of money.

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Risks related to money’s easy access

You need easy access to your money, especially for your emergencies. Since this means typically going for lower risk, lower return investments, there is always the danger of either having invested too less, or too much, in these investments. While the dangers of inadequate emergency funds are obvious, excess liquid investments means retirement savings can’t grow well.

Tax inefficiency

It is of great importance that re-investments of retirement savings are made in a tax-efficient way so that your savings can keep growing.

With a brief background on the financial risks to retirement, it is time to discuss the various investment options and see the edge debt funds as an option have.

Regular Retirement Income Options

Fixed deposits

In India, fixed deposits (FDs) from banks and post office are quite popular with investors. While FDs provide regular income from their interest, the income is fully taxable. This can hurt those in the higher tax slabs. What’s more, the income also gets hit by inflation. An FD providing annual interest of 7%, effectively provides 1.9% if the annual inflation rate is 5%. What’s more, any premature exit from the FD rates typically to lower applicable slab if you exit before maturity.

Post Office Monthly Income Scheme (POMIS)

This is a five year regular income investment that is available in the post offices. For an investment up to a limit of Rs 4.5 lakh for an individual and Rs 9 lakh for a joint account, you receive monthly income. The monthly income comes to you thanks to the interest paid out. The interest rates are revised periodically along with other small savings schemes available in post offices.

Apart from the limits to the maximum amount of investment and the lock-in during the tenure, there are significant penalties for premature exit.  Importantly, the interest income is fully taxable. A drastic revision in interest rates during the tenure means sudden decline of regular income without recourse to an alternative. These are significant limitations for those in the highest tax slabs looking to park their substantial retirement savings.

The other limitations pertain to the fact that being a regular income investment, the scheme is not appropriate for meeting significant periodic expenses and expenses requiring lump sum amounts.

Senior Citizens Savings Scheme

Over the years, this scheme has been very popular with the retirees due to its interest rate, which is typically is higher than alternatives. This is a five year scheme that can be extended by three years. You can invest up to Rs 15 lakh and the interest rate gets revised periodically along with other small savings schemes.

Like POMIS, Senior Citizens Savings Scheme has some significant limitations. While interest is calculated annually, it is paid quarterly and the interest income is fully taxable. You can’t make premature exits from the investment without paying stiff penalties. The regular income character of the investment means that it is unsuitable for meeting certain types of expenses such as large periodic and lump sum expenses.

Life insurance annuities

Whether you save money for retirement in a life insurance policy or any other investment, you can invest in life insurance annuities. They provide regular income. Annuities can provide monthly income for different periods of time and in some cases, even your whole life. There are many other variants of annuities including those that also pay the regular income to spouse and heirs.

Whether you save money for retirement in a life insurance policy or any other investment, you can invest in life insurance annuities. They provide regular income. Annuities can provide monthly income for different periods of time and in some cases, even your whole life. There are many other variants of annuities including those that also pay the regular income to spouse and heirs.

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How Debt Funds Score Over Others


“Will I get access to my money during an emergency?”

This is a question that most retirees ask when they invest their retirement savings. Thus, easy access to money is key requirement for most retirees.

Unlike investment options that we have just discussed which have lock-in periods, in case of emergency, you can liquidate units of open-end debt funds any time you want. Once you liquidate your units, the money is credited in the account within 2-3 working days. Even for close-end debt funds like fixed maturity plans (FMPs) where you need to stay invested till maturity, you can sell off the units in stock exchanges in case of emergency.

Tax efficiency

Debt funds tend to be more tax efficient than interest bearing investments. Dividends from debt funds are tax-free in the hands of the investors. There are tax benefits in case of capital gains as well. If you remain invested for 3 year or more, the capital gains are treated as long term capital gains. In such a case, you get twin tax benefits.

First, you benefit from inflation indexation. This involves enhancing upwards, the cost of acquired debt fund units, by the amount of inflation during the period of investment. Effectively, this reduces the taxable capital gains. You further benefit from a 20%

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long term capital gains tax rate. This is much lower than the tax impact in case of interest bearing investment for those in the highest tax slab. Of course, for any period less than 3 years, the capital gains get added to the income and are taxed according to the relevant income tax rate for an investor.


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Combating inflation

The inflation indexation benefit for long term capital gains taxation ensures that you get to retain more of the growth of your retirement savings. It also ensures that those in the highest 30% tax slab get to combat inflation far more effectively than interest bearing investments.

Growth of retirement savings

Debt fund investments have the potential to provide significantly higher returns than fixed income alternatives. This is because they can take advantage of investment opportunities and market conditions like interest rate movements. This advantage gets enhanced after returns get adjusted for taxes and inflation.

Apart from the advantages that we have just listed, debt funds help you meet other major financial requirements in retirement.

Regular income from SWP and dividends

Debt funds can provide for regular retirement income not only from the dividends but also through the facility of systematic withdrawal plan (SWP). It provides regular income, typically every month, by selling debt fund units. This is tax efficient as well. The long term capital gains tax of 20% is charged on debt fund units bought more than 3 years ago with inflation indexation benefits.

Periodic and lump sum requirements

Close-end debt funds, especially fixed maturity plans (FMP), can play a great role in meeting substantial periodic and lump sum expenses that arise in retirement. FMPs mature at a pre-determined date like one, three and five years and have an edge over other alternatives like FDs.

As FMPs hold debt securities like government securities, corporate debt and money market instruments till maturity, they provide broadly stable returns. Added to that are tax benefits that debt funds get, especially when the debt funds investments are more than 3 years.

There is also the inflation combating ability. Thanks to the inflation indexation facility in taxation of long term capital gains, it further drives home the advantage.

Emergency requirements

Future health and other emergencies are often at the back of mind of retirees. Making provisions for emergencies such as setting aside 3-6 months of monthly expenses, or more, often helps. However, quick and easy access holds the key. Investments in ultra-short term debt funds and liquid funds help retirees meet this need so that they are prepared for emergencies without compromising on all the other needs.

Clearly, mutual funds can be a financial Swiss knife for retirees, a multi-functional tool that can help meet various retirement needs. In retirement, they can not only help get the regular ping on the mobile on the crediting of regular income but also provide much more.

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