Mutual Funds

Fund Query: Mutual fund options for senior citizens

Parvatha Vardhini CBL Research Bureau | Updated on January 16, 2021

My FDs worth ₹6 lakh is maturing shortly. I am in the 30 per cent tax slab. Can you suggest how I can invest this money in mutual funds to get an annual return of around 8 per cent? I am a senior citizen, and have exhausted all other investment avenues, such as post office schemes, etc. I am also willing to take some risk.

AR Ramanarayanan

Considering that you are a senior citizen, we are recommending mutual funds based only on the fact that you are willing to take some risk and also because you have exhausted most other fixed-income options.

We assume that you don’t need this corpus for the next few years and you have other streams of regular income and emergency corpus.

Debt funds can be suitable if you are willing to stay invested for at least three years. Capital gains made after three years on such investments are treated as long-term and are eligible for indexation benefit.

Long-term capital gains from debt funds are taxed at 20 per cent after indexation. This makes them more tax-efficient (ie, gives higher post tax returns) than other fixed-income instruments such as FDs where the returns are taxed at your income tax slab rate (30 per cent, in your case). Of course, all debt funds are subject to interest-rate risk and credit risk which may dent the returns. Hence, the choice of funds also play a role.

You can go for corporate bond funds, and banking and PSU debt funds. Corporate bond funds are debt schemes that must invest at least 80 per cent of their assets in only the highest-rated corporate bonds.

Banking and PSU debt funds have to invest at least 80 per cent in debt instruments of banks, public sector undertakings and public financial institutions. These are relatively safe categories under debt funds. Over the past three- and five-year periods, they have delivered an annual return of 7-8 per cent on an average.

Kotak Corporate Bond Fund is a suitable bet. It has consistently held at least 89 per cent of its portfolio in AAA rated and sovereign debt papers in the last 2-3 years. It has largely maintained an average portfolio maturity of 1-2.3 years in the past five years. These attributes cap the fund’s interest-rate risk and credit risks.

Axis Banking & PSU Debt fund and IDFC Banking & PSU Debt Fund are other options that have high exposure to instruments with maximum credit rating as well as lower average portfolio maturity as per latest portfolios. Hence, they are safer choices within banking and PSU debt funds. All these funds are rated five/four star in BusinessLine Portfolio Star Track MF Ratings.

I have the following monthly SIPs: ₹4,000 in Kotak Standard Multicap, Mirae Asset Emerging Bluechip and Invesco India Growth Opportunities, and ₹6,000 in SBI Focused Equity. For all the above, I have chosen direct scheme and growth plan. Can you please advise if I could replace the Invesco fund with Parag Parikh Long Term Equity?

Srinivas AR

You have one flexi-cap fund (Kotak Standard Multicap, now renamed Kotak Flexicap), two large- and mid-cap category funds (Mirae Emerging Bluechip and Invesco India Growth Opportunities) and one focussed fund (SBI Focused Equity). All these schemes are good performers and are rated five- or four-star in BusinessLine Portfolio Star Track MF Ratings.

What differentiates Parag Parikh Long Term Equity (now renamed Parag Parikh Flexicap) from your current holdings is international exposure. The scheme invests up to 35 per cent of its portfolio in foreign stocks. Low correlation of Indian markets with the US markets over the long term, as well as benefits of rupee depreciation versus the dollar (3-4 per cent annually) are factors in favour of taking exposure to foreign markets. The fund is also a good performer over longer time periods and is rated five-star by us. You can hence take exposure to Parag Parikh Flexicap.

Published on January 16, 2021

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