- Date : 15/02/2023
- Read: 3 mins
As you enter retirement, it is important to adjust your investment strategy to prepare for the future. Learn why it's important to shift from equity to debt fund investments when nearing retirement.
You will likely witness a lot of changes after you retire. No more office or the time-consuming commute. You may also have more time on hand to pursue your interests. These changes will not be limited to your life but also reflect in your investment portfolio. In the years leading up to retirement, the focus shifts from growth to capital preservation. Debt investments are generally considered less volatile and provide a more stable income source than equity investments. Find out more about what should win between equity vs debt if you are nearing retirement.
What are debt and equity?
Debt and equity are two asset classes that you can invest in. Debt refers to borrowing. When you invest in debt fund instruments, you lend money to organisations and individuals and earn a return in the form of interest. On the other hand, equity signifies ownership. When you invest in a company's equity, you get a stake in the organisation. When the company grows, its stock prices increase. You earn returns when you buy these stocks at a low price and sell them at a higher cost.
Also Read: How Debt And Equity Based Mutual Funds Differ In Risk
Why are debt investment options ideal for pre-and post-retirement?
Shifting investment from equity to debt is recommended at this stage of life because the latter offers less risk and more stability. Equity is a volatile asset class that is subject to market fluctuations. Therefore, it is suitable for young investors or those with a long investment horizon. If you are close to retirement, your risk drops, and so does your investment horizon. Any major market movements at this time can lead to losses. Since you would not have enough time and a steady salary as a security blanket, you can benefit from switching to debt and preserving your capital.
Debt fund instruments for people nearing retirement
Here are some investment options you can consider:
- Systematic transfer plan: If you have been investing in equity funds up until now, you can use an STP to transfer funds from an equity scheme of a mutual fund house to a debt scheme of the same house at pre-defined values and intervals.
- Systematic investment plan in debt funds: Debt mutual funds invest in fixed-income instruments like commercial papers, government bonds, etc. There are 16 types of debt funds as per SEBI's categorisation.
- Public Provident Fund: PPF is a government-backed savings scheme suitable for long-term goals like retirement. It offers low risk, tax benefits, and assured returns.
- Fixed deposits or recurring deposits: Term deposits like fixed and recurring deposits also offer low risk and guaranteed returns, making them ideal for goals like retirement. A five-year fixed deposit also provides tax advantages, which can lead to more savings.
Also Read: Do You Wish For A Retirement Savings Of Rs 10 Crore? Invest In These Funds
Impact of investing in debt fund instruments on investors
Switching to debt can help you preserve your wealth and bring financial stability. With low risk and more or less assured returns, these investment options can be ideal for this phase of your life. However, this shift should be based on your specific financial situation and goals, and it is recommended to seek the advice of a financial advisor.
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You will likely witness a lot of changes after you retire. No more office or the time-consuming commute. You may also have more time on hand to pursue your interests. These changes will not be limited to your life but also reflect in your investment portfolio. In the years leading up to retirement, the focus shifts from growth to capital preservation. Debt investments are generally considered less volatile and provide a more stable income source than equity investments. Find out more about what should win between equity vs debt if you are nearing retirement.
What are debt and equity?
Debt and equity are two asset classes that you can invest in. Debt refers to borrowing. When you invest in debt fund instruments, you lend money to organisations and individuals and earn a return in the form of interest. On the other hand, equity signifies ownership. When you invest in a company's equity, you get a stake in the organisation. When the company grows, its stock prices increase. You earn returns when you buy these stocks at a low price and sell them at a higher cost.
Also Read: How Debt And Equity Based Mutual Funds Differ In Risk
Why are debt investment options ideal for pre-and post-retirement?
Shifting investment from equity to debt is recommended at this stage of life because the latter offers less risk and more stability. Equity is a volatile asset class that is subject to market fluctuations. Therefore, it is suitable for young investors or those with a long investment horizon. If you are close to retirement, your risk drops, and so does your investment horizon. Any major market movements at this time can lead to losses. Since you would not have enough time and a steady salary as a security blanket, you can benefit from switching to debt and preserving your capital.
Debt fund instruments for people nearing retirement
Here are some investment options you can consider:
- Systematic transfer plan: If you have been investing in equity funds up until now, you can use an STP to transfer funds from an equity scheme of a mutual fund house to a debt scheme of the same house at pre-defined values and intervals.
- Systematic investment plan in debt funds: Debt mutual funds invest in fixed-income instruments like commercial papers, government bonds, etc. There are 16 types of debt funds as per SEBI's categorisation.
- Public Provident Fund: PPF is a government-backed savings scheme suitable for long-term goals like retirement. It offers low risk, tax benefits, and assured returns.
- Fixed deposits or recurring deposits: Term deposits like fixed and recurring deposits also offer low risk and guaranteed returns, making them ideal for goals like retirement. A five-year fixed deposit also provides tax advantages, which can lead to more savings.
Also Read: Do You Wish For A Retirement Savings Of Rs 10 Crore? Invest In These Funds
Impact of investing in debt fund instruments on investors
Switching to debt can help you preserve your wealth and bring financial stability. With low risk and more or less assured returns, these investment options can be ideal for this phase of your life. However, this shift should be based on your specific financial situation and goals, and it is recommended to seek the advice of a financial advisor.
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