A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
Should retirees invest in mutual funds?
Retirees usually have their savings and investments locked into FD banks, PPFs, gold, real estate, insurance, retirement plans etc. Most of these options are difficult to convert to cash immediately. This can lead to excessive stress in case of medical or other emergencies. Mutual funds provide much-needed liquidity to retirees as they are easy to withdraw and offer better after-tax returns.
Most retirees fear volatility or fluctuation in mutual fund returns and move away from them. They should put a portion of their pension corpus into debt mutual funds and go for a systematic withdrawal plan (SWP). This will help them earn a regular monthly income from such investments. Debt funds are relatively safer than equity funds as they invest in bonds issued by banks, corporations, government bodies and money market instruments (bank CDs, T-bills, Commercial Papers).
SWPs in debt funds provide efficient tax returns compared to bank FDs. Income from FD/retirement plans is taxed at higher effective rates than withdrawals under SWP. You can easily stop a SWP or change the withdrawal amount at any time depending on your needs unlike a retirement plan. Therefore, retirees should include mutual funds in their financial plans.
