As a senior citizen, is it safe to invest in thematic mutual funds, NFOs? Can you elaborate on the risk factors?

I am 72 year old and I stay in Delhi. Should I invest in thematic mutual funds? Like infra funds, defence funds. I see a lot of new fund offers (NFOs) being launched every week? Can you guide me?

Name withheld on request.

Response by Atul Shinghal, Founder & CEO, Scripbox

A 72-year-old investor might be seeking regular income along with safety of capital. For these objectives, the debt funds are the best suited. Debt funds categories like short-term funds, corporate bond funds, banking and PSU debt funds are the most suitable in our opinion.

For investors with higher risk tolerance hybrid schemes like Debt Hybrid, Equity Savings and Balanced Advantage funds can prove to be better as these categories offer less exposure to equity markets as compared to diversified equity funds and categories like Equity Savings and Balanced Advantage also offer tax advantage vis a vis Debt oriented categories.

Generally, senior citizens should avoid thematic categories like Infrastructure as the investment in Infrastructure is more sensitive to market cycle (high Beta) and hence have higher risk vis a vis a diversified equity fund and typical infra projects have a long gestation period. In our opinion categories like Large cap, Flexicap and value funds are better suited for senior citizens.

Generating a regular income from an accumulated corpus can significantly contribute to ensuring a comfortable post-retirement lifestyle. It is a common preference among senior citizens to opt for a conservative approach when it comes to managing their funds. Additionally, they value the liquidity of their investments, as it provides them with the flexibility to access funds swiftly in case of an emergency.

A debt fund is a mutual fund scheme that invests in fixed-income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. 

Debt funds are financial instruments that invest in a variety of debt instruments, including Corporate and Government Bonds, at a specific price with the intention to later sell them at a profit. The difference between the initial cost of acquisition and the selling price contributes to the appreciation or depreciation of the fund’s net asset value (NAV). Additionally, debt funds generate regular income through interest payments from the underlying debt securities in which they are invested.

In terms of returns, debt funds that accrue interest from fixed income instruments throughout the fund’s duration bear similarities to bank fixed deposits in terms of interest earnings. This interest income is typically credited to the debt fund on a daily basis. For instance, if interest is received annually, it is divided by 365 days, causing a slight increase in the debt fund’s NAV each day. Therefore, the NAV of a debt scheme is influenced not only by the interest rates associated with its underlying assets but also by any changes in the credit rating of the investments.

It is essential to note that the market prices of debt securities fluctuate based on movements in interest rates.

Before making any investment decisions, it is essential to carefully determine your actual financial requirements. Begin by estimating your monthly expenses and consider any additional income streams you may have, such as rental income, pension payments, or contributions from family members. 

Calculate what percentage of your total funds you anticipate using each year. It is generally recommended to limit annual withdrawals to 4-6% of your total portfolio. For instance, if your investment portfolio amounts to Rs 1 crore, your annual withdrawals should not exceed Rs 6 lakh. Withdrawals that exceed this 6% threshold could potentially lead to financial difficulties in the later years of retirement. Do not ignore inflation. 

Here’s a list of some of the top debt funds: