Senior citizens typically invest in guaranteed investment tools to avoid losing their hard-earned money. Yet, completely ignoring equity exposure might be a disadvantage during high inflationary periods because inflation may eat into their savings and investments. Let’s understand the concept and the 5 Factors To Consider When Buying Mutual Funds

Inflation rose from 3.3 per cent in 2017 to 6.7 per cent in 2022, more than the Reserve Bank of India’s (RBI) tolerance level. Against this background, mutual funds, which offer equity exposure, could be one of the tools to boost your chance of beating inflation, provided you select the right product. So if you are in a dilemma about choosing a suitable mutual fund scheme.

Choose Investment Goals And Time-Horizon Wisely 

Before investing in any instrument, determine the investment goals.

Abhijit Talukdar, a Sebi-registered investment advisor, explains: “If it is wealth growth, they can consider equity mutual funds. If it is wealth protection, they should restrict themselves to debt mutual funds. And if the objective is only to beat inflation, invest in ultra-short debt mutual funds since the interest rates normally move in sync with inflation.”

He says investors can benefit from such funds if they have an investment horizon of less than six months. And the exit load on such funds is also usually nil. Although this objective can be achieved through bank fixed deposits or post office deposit schemes, these tools do not have the flexibility of early withdrawal without penalties, adds Talukdar.

Additionally, one should decide on the time horizon and investment objectives to select a suitable product from a plethora of mutual fund schemes offered by the fund houses. It will help determine which equity or debt funds are ideal for different time horizons.

Talukdar says, “If it is five years or more, they can consider investing some portion of their corpus in equity mutual funds. Else, they should restrict themselves to debt mutual funds.”

Why Risk Appetite Matters 

Different people have different risk-bearing capacities. After considering that, individuals can explore whether to invest in equity or debt schemes. Also, in the equities, for example, it could be large-, mid-, or small-cap funds with different risk profiles. Large-cap funds could be more stable than small-cap, but the latter could offer higher returns. On the other hand, debt funds would be less risky. Investors should check the risks given in the scheme information document. Says Talukdar, it is up to the individual’s risk-taking capacity whether to opt for equity funds which generate high returns but have a higher risk.

Look Out For Exit Load And Other Charges 

While comparing mutual funds, check the scheme’s entry and exit load and the expense ratio to select the best fund, even for a systematic investment plan (SIP).

Fund Manager Is Key 

The schemes’ historical return gives an idea of how a fund has performed, although it is no guarantee of the future. Besides the fund’s performance, one should check the fund manager’s credentials as their decision is critical to the fund’s performance. One should also consider the asset management company’s investment and risk management practices.

Be Aware Of Cash Flow Needs 

Cash flow is an important aspect to consider in retirement portfolio planning. One should know how much cash they will need and the proper selection of mutual fund schemes. Equity funds need more time to grow, so liquid funds could be an option if one requires periodic cash.

Says Talukdar: “Allocation between equity and debt is a matter of asset allocation and differs from case to case. However, as a thumb rule, allocation to equity as a percentage should be no more than 100, minus the age of the senior citizen.”

The selection of schemes is not a one-time exercise. The portfolio must be reviewed and rebalanced regularly to generate inflation-beating returns while monitoring the risks involved.