Equity participation in India has witnessed significant growth over the past few years, with the number of active investor accounts growing by more than a crore in 2020 alone.
Data from the Securities and Exchange Board of India (Sebi) shows that the majority of these new accounts belong to investors between the ages of 24 and 39. Millennials’ active participation in the markets is no secret, but when it comes to seniors, there seems to be a weak affinity for equity products.
Given the volatility of the stock market, it’s understandable that investors nearing retirement age are reluctant to invest in stocks. However, exposure to equity instruments is necessary for inflation-beating returns and long-term wealth. Therefore, instead of limiting their portfolio to safer investment options, seniors can explore how to take advantage of the markets with minimum risk.
Seniors can benefit in several ways by having a certain percentage of equity exposure in their financial portfolios. If you’re nearing retirement, find out how stock market investing can benefit you.
If you liquidate your stock holdings within 12 months of purchase, your gains are classified as short-term capital gains (STCG). And, if you hold your stock investments for at least 12 months before liquidation, the gains qualify as long-term capital gains (LTCG). While tax on STCG is at a flat rate of 15%, LTCG is taxed at 10%.
By comparison, interest income from most fixed-income assets is taxable at your income tax slab rate, which can be as high as 30%. Thus, equity investments may offer lower tax rates, depending on the income bracket that applies to you.
Additional income via dividends
After retirement, older people have no regular source of income to rely on. It is therefore crucial to set up additional and alternative sources of income to support you once you retire. The stock market can help you here too. You can invest in dividend-paying stocks or equity mutual funds to earn additional income.
Wealth creation for post-retirement
The stock market, while carrying higher risk, also offers the potential to deliver superior returns to most other asset classes. This potential for wealth creation can be beneficial for your life goals after retirement. By earning higher returns, you can take that extended tour you have planned or start your own home business without any financial compromise.
Seniors who wish to invest in the markets should be aware that it is not a question of completely avoiding risk. Rather, it is about managing market risk as effectively as possible. Here are some tips to help senior investors navigate the markets safely.
Diversify your portfolio
Although equity investments are volatile, it is possible to reduce the overall risk of your investment portfolio, and diversification is key to achieving this goal. The right diversification strategy protects your investments from the ups and downs of the market. If you are approaching retirement age, more exposure to fixed income investments and a modest dose of equities would be ideal.
Here is an example of a diversified portfolio: 30% in fixed income investments; 20% gold; 30% in pension plans and 20% in equity. Although this portfolio is exposed to equities, the overall risk is negligible due to the allocation of capital between different asset classes.
Bundled investment options
If you want to further reduce the risk in your portfolio without jeopardizing your stock investments, you can choose to go the pooled investing route. In other words, you can include stock mutual funds in your portfolio. These funds pool capital from various investors and invest that money in different stocks. Equity funds can be large cap, mid cap, small cap, dividend paying or growth oriented. This approach inherently diversifies your equity investments. Plus, professional mutual fund management ensures access to best-in-class research for safer investments in the market.
Get help from a financial expert
A financial expert can help older investors make more informed investment decisions. So, if you don’t know which stocks to invest in, you can always ask an expert for help. A professional can point you in the right direction and help you tie your stock investments to your life goals after retirement.
The bottom line is that senior citizens, like all other investors, can invest in the stock market. Although the stock market can be risky, there should be no problem if you are careful and have the right investment plan in place. All it takes is the right approach to make the markets work for you, even as you approach your 60s.