Everyone spends at least two-thirds of their life earnings and savings for their retired life. In other words, you spend at least 40 years of your life being concerned if you have saved enough in the right instrument for a worry-free and a financially-stable retirement.
However, even if you have saved enough for your retirement to be worry-free, it does not mean that you discontinue investing. You may only plan the best for a future that you cannot predict. This implies that all your planning and investments today for a financially secure future might be more than enough or might fall short for the future.
A common question as you grow older is if you must assume equity exposure because of its higher risk. Several investment experts also advise that you must invest in safer investments such as fixed deposits (FDs) or a Public Provident Fund (PPF) as you near your retirement age.
The rationale
Experts recommend exiting investments like Equity-Linked Savings Schemes (ELSS) as you grow older. The rationale is that as you near retirement, you become risk-averse; you are unable to withstand huge losses. However, studies show that if you shift your investments in safer tax-saving investments like PPF and FDs, you may grow poorer each passing year.
Inflation—the culprit
Today, life expectancy of an average individual is around 85 years. Therefore, you will have to park your money in products that allow you to achieve financial freedom for 25 years or longer. Safe tax-saving investments deliver guaranteed but lower returns. Unfortunately, the rate of inflation is also constantly rising. Therefore, safer investments’ returns are often inadequate to meet inflation. As a result, you will find yourself unable to sustain your regular expenses even after having made investments all through your working life.
The solution
Historically, equities have delivered exceptional returns in the long term. Since you are going to live for several years after your retirement, you may consider investing in equities or related products. Even if you do not want to assume the high risk of direct equity, you may invest in ELSS funds. Such funds invest a majority of its corpus in equities and related products, which has a potential to deliver inflation-beating returns.
Here are three benefits you enjoy when you buy ELSS funds.
- Shorter lock-in period
PPF has a lock-in period of 15 years and tax-saving FDs come with a lock-in period of five years. In comparison, ELSS funds have only a three-year lock-in period, which makes ELSS investments more liquid than other safer investment options.
- Tax-free returns
The returns on tax-saving FDs are subject to income tax as per your income tax slab. Furthermore, tax deducted at source (TDS) is applicable on the annual interest income. In comparison, when you invest in ELSS funds, you enjoy an EEE (exempt, exempt, exempt) status. This means the principal, dividends, and maturity proceeds are all tax-free.
- Flexibility
You may buy ELSS either as a one-time lumpsum investment or as a Systematic Investment Plan (SIP). Furthermore, unlike investments such as PPF that have minimum investment requirements, there is no minimum requirement when you buy ELSS funds. You can start investing in these funds with a nominal amount of INR 500. This makes ELSS more flexible.
To invest or not?
The question whether ELSS investments are advisable or not for retirees does not have a yes or no answer. Simply because you have the surplus or a longer investment horizon, investing in ELSS is not advisable. If you primarily depend on your investments for meeting your expenses post-retirement, a high risk may not be advisable. However, if you have other sources of income, assuming higher risk to earn greater returns may be a good option.
As with all mutual fund investments, there is a substantial amount of research and technical know-how involved in selecting the right ELSS funds to invest in. Angel Wealth has recently launched a proprietary ARQ investment engine that carries out a detailed research and analysis of all the funds and provides investment recommendations that are free of human bias on the Angel Wealth mobile application. This technology-driven machine-learning tool simplifies the decision-making process of choosing the right investment option for your financial needs.
Whether you are looking for tax-saving options or simply seeking wealth-accumulating options, all you need to do is plan well in advance by making use of technologically-advanced tools such as ARQ to access available mutual fund investment options and choose the right one for you.
Download the Angel Wealth app today to use the most technologically-advanced tool and make a well-informed decision for a financially secure future.