Senior Citizens and stock market investing

However, having said this, with the current circumstances being such that returns from all traditional asset classes such as FD’s, government instruments such as NSC and post office schemes, and other fixed maturity avenues not able to beat inflation, equities and other long duration assets are the only means to protect value erosion of the corpus earned though hard work.

Over the past several decades, equities as an asset class have delivered handsomely and beat all asset classes by a wide margin. The average returns from equities in the past three decades have been in the range of 14%-15% as opposed to high single digit returns from fixed income earning assets.

How can senior citizens participate in stock markets without having to worry about volatility and value erosion?

A few pointers for senior citizens that would help them invest in stock markets and yet not lose sleep are enlisted below:

By having a disciplined approach
This means that it would be wise to limit the exposure to equities; depending upon how much the person would set aside as funds that are not immediately required. Only a certain portion, say 20%-25% of the total corpus (or what can be spared for a period of 5 years or more) could be earmarked for investing into equities and related instruments.

By taking a pooled investment approach
It is always better to make investment into collective investment vehicles such as mutual funds schemes which allow for an individual to diversify risk by investing in basket of stocks. Ideally investing in schemes / funds that invest in large capitalization stocks can be chosen for the said purpose.

By spreading the investment time horizon
Most senior citizens have access to a large pool of money, which is earned by them via retirement benefits from employers, subscription to retirement products when they were young etc. As a result, the allocation of these funds into financial products could become an exercise which is prone to a timing issue. This can be eliminated by investing using a systematic approach. For instance, mutual funds schemes allow for systematic transfer into any scheme of choice and this would reduce the timing hazard of lump sum investment into equities, thereby reducing risk of high volatility to a great extent.

By looking at quality and going for dividends
Seasoned investors, when they reach retirement, typically invest in high quality companies which have proven track record of paying dividends. This allows for multiple benefits; first there is a regular yearly income in form of dividends, it helps the person save tax (all dividends are tax free in the hands of investors) and helps protect principle over a longer time frame. Of course it would need certain amount of monitoring and following up on company performance; on a yearly basis at the minimum.

By looking for high liquidity in the investments
Stock markets provide for very high liquidity. Unlike many traditional investments which tend to have lock-in periods and penalties for pre-mature withdrawals, investment in stock market MF schemes or direct exposure would keep the investment highly liquid. This would help in case of an urgent need for funds.

Senior citizens have to worry about many things during current times. Taking care of health care expenses and living expenses are the basic things they have to provide for. With the high inflation environment currently, the ability to service both these expenses gets increasingly difficult and therefore protection of the corpus generated by higher yielding investment becomes necessary. Stock market is one such avenue where a certain portion of the corpus can definitely be made inflation proof, albeit keeping in mind all the pointers mentioned above.

Anil Rego

The author is CEO & Founder of Right Horizons. He can be reached at anilrego@righthorizons.com