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Senior Citizens and stock market – Why to invest, how to invest

This article looks at the importance of stock markets when it comes to investment by senior citizens. It explains why seniors should invest in stocks, how they can do this, and how much should they invest.

Take a scenario where you are 55 years old, and are approaching retirement. What does common investment wisdom tell you? You should shift all your investments to safe – preferably government – investment avenues.

Or, say you just retired, and have received a large lump-sum amount through provident fund (PF), gratuity, etc. Where do you invest this? Again, common investment wisdom tells you to invest everything in safe investment avenues.

Most asset allocation strategies also ask you to shift assets from riskier asset classes (like equities) to safe investments (like debt or FDs) as your age increases.

Bottomline – It is very commonly believed that equities or shares should not be a part of your investment portfolio if you are a senior citizen.

This can not be any further from truth!

 

Returns from “safe” investment avenues can be inadequate

Let’s face it: All safe investment avenues give extremely low return on investment – the return can hardly beat inflation. This means that every successive year, you can buy lesser and lesser things using the interest you earn through such investments.

(Please read “Saving enough is not enough – Effect of Inflation on Savings” to know more about inflation and its impact on your finances)

Even schemes tailored for elders – like Senior Citizens Savings Scheme (SCSS) – provides for just 9% return. Subtract income tax, and this too reduces to a very unattractive level.

Remember: The higher the return, the longer your retirement corpus can sustain you. Consequently, the higher the return, the lesser is the retirement corpus required for you.

Let’s understand this using an example.

 

Example

Let’s say you are 60 years old, and are retiring today. Your monthly expenditure today is20,000. You expect to live till the age of 85 years, and the average rate of inflation is 5%.

The golden question: How much money would be enough to provide for you till the age of 85 years? What should be your retirement corpus?

Well, as you would have guessed, it depends on the return you can generate from your investments.

If the rate of return is 7%, the corpus needed would be47 Lakhs. Whereas if the return is 8%, the corpus needed would be42 Lakhs.

That is, if you can increase the rate of return by 1%, your required retirement corpus would reduce by 10.5%!

 

Why senior citizens should invest in equities?

And how do you increase your returns by 1%? By investing some of your money in equities!

Stocks have returned about 17% (compounded) in the last 15 years. And this has been the trend – stocks return anywhere from 15% to 18% when an investment is made for a long term.

(For more, please read “Stocks – The winning bet for the long term”)

Thus, stocks provide a return way better than various safe investment avenues like bank fixed deposits (FDs), SCSS, National Savings Certificate (NSC), Kisan Vikas Patra (KVP), Post Office Monthly Income Scheme (MIS), etc.

So investing just a small proportion of your corpus in stocks can give a boost to your overall returns!

 

How much should a senior citizen invest in equities?

Does it mean that you invest half your money in safe avenues, and the other half in shares? No!

Remember, stability of returns is very important when you do not have any other source of income, and this is what should dictate the choice of investment avenues for most of your corpus.

(Please read “Retirement money: How to invest, where to invest” for more)

Only a small proportion of your money should be invested in equities, so that it gives some boost to your overall returns while not causing any instability in your portfolio.

How much exactly you should invest depends on your particular situation. However, as a ballpark, equity investment should form 10% to 20% of your investment corpus if you are a senior citizen.

 

 

 

Where should the money be invested?

Ok, now that we know how much should be invested, the next question is – where should this investment be made?

Should you invest it directly in stocks? If yes, which type of stocks? If not, through what kind of mutual funds?

You should avoid direct investment in shares – you should do it only if you think you have the time, inclination, patience and talent to choose the right stocks.

If at all you invest in stocks directly, you should avoid mid-cap and small-cap shares. These tend to give very high returns during bullish times, but their price also falls very quickly during bearish phases. Thus, they should be avoided due to their volatility.

(To know more about market capitalization and classification of stocks based on it, please read “One size doesn’t fit all – Large cap, mid cap and small cap stocks”)

As far as possible, try to invest in equities using mutual funds. (Check out “Direct investment in Stocks versus Mutual Funds (MFs)?” for more)

You should invest in diversified equity funds having most of their investment in large cap stocks (or, in market terms, diversified equity funds with a “large cap bias”).

Please refrain from investing in equity funds that focus on mid cap or small cap stocks, or sector specific funds – these tend to be quite volatile, and should be avoided by senior citizens.

 

How should you invest in stocks?

This brings us to the final question: How should you invest in these funds? Should it be in one go, or should the investment be spread out?

Investing a large lump sum in equities in one go is never a good idea. Volatility is an inherent trait of equities, and we should exploit it to lower our cost. Thus, you should spread out your investment over a period of time – at least a year.

(Please read “Cost Averaging” to know the benefits of doing this)

But the problem is: you have a large sum to invest immediately! Should you keep it in a bank account and invest from it every month?

No, there is an easy (and more efficient!) way out. You can invest the amount in debt mutual funds (which are very good for short term investments, and give good, safe returns). And you should transfer a fixed amount from this debt MF to your chosen equity MF every month using a Systematic Transfer Plan (STP).

This way, you would not have to worry about investing every month, but at the same time, you would be investing systematically. Not to mention that you would be earning a healthy return in the mean time!

 

Still not convinced about equity investment?

We saw why investment in equities is a must for senior citizens. However, you might not be convinced, or might still be worried about the risk. If this is the case, there is a good (and safe!) middle path as well.

You can invest a portion of your retirement corpus in bank fixed deposits (FD), and choose a monthly interest option. Using this interest that you get every month, you can start a Systematic Investment Plan (SIP) in an equity MF.

This way, you would be investing in equities and gaining from the higher returns. But at the same time, you would be keeping your corpus (principal) safe. The returns would not be as good as investing the amount directly in equity MFs – but it is definitely better than not investing in equities at all!

 

A note about “share trading” and genuine performance evaluation

Long term investment doesn’t mean you invest and forget – you do need to evaluate the performance of your investments from time to time, and switch from one MF scheme to another if needed.

But this need not be done one a daily or weekly basis – evaluating performance of your investments versus other schemes every 6 months is adequate.

If you buy and sell more frequently, it is just short term trading, and is not desirable. Please remember that small investors like you and me should only invest in stocks for the long term.

Many people get involved in short term trading in shares – even intra-day transactions. It can be out of genuine desire to earn good returns through “tips”, to compare returns with their friends’ returns, or simply to pass time.

However, short term trading can generate profits only if you enter into very large (and frequent) transactions, and have access to up-to-the-minute market data and news – something that only professional traders can have.

Therefore, “trading” in shares should be avoided by all retail investors, including senior citizens.

(To know the advantages of investing in equities for the long term, please read “Stocks – The winning bet for the long term”)

[As published in the magazine "Dignity Dialogue"]

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