There’s an underlying prejudice in the investing community that asset allocation has to be age dependant. This is especially evident when it comes to equity investments by the higher or elder age group.
Mutual funds good bet for risk-free returns
Arguably, equity is the best asset class in the longer run which could offer real rate of returns, not just beating the inflation, while retaining higher liquidity. It also tops up with better tax efficiency compelling a serious case for its consideration. But, there is an underlying assumption by investors as well as advisors that an exposure to equities in the twilight years is either shunned or made too minimal.
If living too short is offset through insurance, the problem of living too long could only be sufficed through greater savings and accurate investments. And equity here plays a crucial role in overcoming this daunting problem of not only generating a larger corpus for the retirement but also protecting the accumulated corpus. Though asset allocation remains the key, a sizable proportion to equity is mandatory chiefly due to the increased longevity.
This is an exact instance where mutual funds claim their strategic role for the equity allocation. Though direct equity could offer higher gains, the risks are momentous and require constant attention. Mutual funds with their in-built diversification provide the passive method of equity investments while delivering the objective with relatively lower volatility.
The quirkier fact is that the retired population also constitute the highest savers across the globe and equally struggle to make decent returns out of their larger corpuses. And most people conventionally also profile their risk as conservative investors and incline towards a major exposure into fixed income instruments which barely go past the inflation. Their hard-earned money and probably a meticulously planned savings now play soft thus generating lesser bread off their dough.
This could be desirably changed with a sizable mutual fund allocation. Of course, the various schemes offer a wide range of choice across different categories of large cap, mid cap and small cap or sectorial. Moreover, they also come with systematic or periodic investment and withdrawal options for the convenience. The lower costs make them attractive and affordable also turning them amicable for portfolio rebalance and adjustments.
However, it’s imperative for the investor and advisor to have deliberations to arrive on what exactly is the proportion of allocation. More prominently, they together could agree on the comfort of the inherent market volatility that equities possess and their possible prolonged lull or subdued performance.
So, it’s off limits for investors whose requirements could be immediate and who were risk-averse all through their lives. Similarly, for people who are completely dependent upon a consistent regular monthly income from the corpus and those who replace the market fluctuations to risk.
Of course, mutual funds don’t simply mean equities but also a wide range of debt or fixed income options which meet various short to medium to long term needs of the investors. For instance, liquid funds could cater to the immediate to near term, the accrual funds (bond oriented) would be a good bet for short term and income-oriented needs while duration funds would be suited for the medium to long term needs.
Even here in debt funds, the risk varies and is borne by the investor and hence needs a greater analysis of their risk appetite. (The author is co-founder of “Wealocity”, a wealth management firm and could be reached at email@example.com)