Mutual Funds

Is ELSS a good fit for retired individuals?

Stocks are a risky asset by nature. Mutual funds tend to diversify the risk by investing in a basket of securities such as stocks, bonds, and the likes.

Among the different categories of funds, there is one category that provides the benefits of tax under section 80C and also provides for better returns due to equity exposure is Equity Linked Savings Schemes (ELSS). ELSS, however, comes with a lock-in of three years.

In this blog, we shall discuss if investing in ELSS makes sense for the retired class of people.

Should retire class opts for ELSS?

There is no clear yes or no to this question. Advisors generally advise investors to move their investments systematically to a safer asset class such as fixed deposits or bonds or debt funds as they are nearing retirement. Some also advise the investors to remain away from equity after retirement because generally retired individuals cannot bear high losses.

But does this make sense?

Well, not really. If a retired investor invests only in a debt fund for safety purpose or chooses a traditional product such as a savings account or fixed deposit, there is a possibility that the investor’s wealth may not be able to cope up with rising inflation (particularly medical inflation) or cost of living.

Remember, life expectancy is increasing and on average people are living till 85 years now. Also, the retirement age remains 60 years. Thus, an individual needs to take care of 25 years of expenses. So, if you have started earning at 25 and have 35 years to save to survive for the last 25 years, you must save enough and let it grow.

For the growth, you need to bet on equities so that you get the benefit of time. But remember, if you have the corpus and time horizon, a retired individual doesn’t need to opt for ELSS.

We believe if a retired individual who is looking for primary income for a livelihood, he/she should not invest in ELSS. For investing in ELSS, risk-taking ability plays a significant role. The answer to ELSS suitability changes if the investor has enough corpus to play with. If the investor has surplus cash and also have cash inflow periodically for living, he may opt for ELSS.

Also, remember, while investing even for the retired class, asset allocation is essential. While some portion of the money goes to the safer Asset allocation is critical here. You put your money in more reliable instruments such as bank fixed deposits, debt funds, liquid funds, and some portion is comparatively less risky ELSS. The right allocation helps the investor balance the risk, return, and also monthly payout.

How are the returns in ELSS against other instruments?

ELSS category has generated phenomenal returns in the past 5-7 years. The double-digit (read in higher teens) returns have been far superior to the fixed deposits that have made sub 10% returns. Also, on the tax front, the equity-based instruments are taxed at 10% on the long-term capital gains if it exceeds 1 Lakh, whereas, on the other hand, the taxation on debt for the long term is 20% but with indexation benefits.

Conclusion

We all agree that equity is a volatile product, but remember that if you have an investment horizon of 3-5 years or longer, equities should fall in your portfolio. As far as retired individuals are considered, upon retirement at 60, individuals need money for at least 25 years, which is a long-term horizon. Thus, even a part of the retirement corpus is earmarked for five years; it should not hurt your financial health. But remember before investing, conduct proper due diligence of the funds and never go all-in to equity. At this, let us introduce you to our app Tarrakki which is available on both iOS and Android. Download the app today to subscribe to ELSS in either lump sum mode or SIP. Also, you may subscribe to our blog that should help you enhance your knowledge of the most suitable investment product of the decade – mutual funds.

Mutual funds Karo, Tarrakki Karo!

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