Should a retired individual invest in equity?

Anil Rego

Financial and Investment planning post retirement becomes quite crucial as one needs to take care of meeting expenses within the available corpus. Another limitation is fresh income is only be in the form of interest or returns on investments made in the past. It is important to have an independent financial life post retirement as during the working life. Focus post retirement should be on investing in order to generate regular income.

It is perceived that because of the volatile nature of the stock market, equity investments are only for the young; and people who are nearing their retirement or have already retired should stay away from stock markets. However investment in stock markets purely depends on the risk appetite of an investor. If the investor is willing to take risk then the investments in equities can be considered, however proportion of investments in equity can be lower in order to reduce the impact of volatility and risks.

It is also perceived that investments in equity markets can be done only through shares; however there are many ways of participating in equity markets without investing directly in stocks. One of the most prominent and easy method is investing in mutual funds. They are less risky as compared to investing directly in shares since they offer higher level of diversification. Also mutual funds offer different categories of funds which are suitable for different types of investors, one can also invest in a combination of different categories of funds which will further provide higher risk adjusted returns.

Investing in equity mutual funds will be beneficial only if the same is done using an appropriate mode of investment. Post retirement there is no regular flow of income; however a lumpsum corpus is available for investment. Thus one can use systematic transfer plan as a tool (STP) to invest in equity mutual funds. In case of STP initially investment is made in debt fund and regularly a sum of money is transferred to equity. STP will help to purchase units at different market period and at different NAV – this will help to reduce the average purchase cost and enhance the returns in long run. In STP one can take the benefit of both debt and equity funds. 

Performance of few Equity mutual funds, however this list should not be considered as recommendation but is for the purpose of information

Post retirement it is advisable to have a lower allocation towards equity, major allocation of the portfolio should be in those avenues which provide regular flow/stream of income without any probability of capital erosion. Also the returns from the portfolio post tax should be higher than the inflation rate. 

An investor can also consider following avenues post retirement to invest their corpus:-

Key Takeaways

• Investment in equities should only be for long term i.e. more than 3 years• Post retirement investment in equity should be done only if one is ready to take risk• Allocation towards equity should be less• Focus should be on generating regular cash flows• Diversify your investments to reduce risks• Returns post tax should be higher than the inflation rate