Equity investment in India has seen significant growth in recent years, with the number of active investor accounts growing by over a million in 2020 alone.
Securities and Exchange Board of India (Sebi) data 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, they seem to have a low affinity for stock products.
Given the volatility of the stock market, it’s understandable that investors approaching retirement age are reluctant to invest in stocks. However, exposure to equity instruments is necessary for inflation-dampening returns and long-term prosperity. Therefore, rather than restricting their portfolio to safer investment options, seniors can explore how to take advantage of the markets with minimal risk.
Seniors can benefit in many ways from having a percentage of equity exposure in their financial portfolios. As you approach retirement, take a look at how stock market investing can benefit you.
If you liquidate your holdings within 12 months of purchase, your gains will be classified as short-term capital gains (STCG). And if you hold your stock investments for at least 12 months prior to liquidation, the gains qualify as long-term capital gains (LTCG). While STCG is taxed at a flat rate of 15%, LTCG is taxed at 10%.
In comparison, interest income from most fixed income assets is taxable at your income tax rate, which can be as high as 30%. So equity investments may offer lower tax rates depending on the income limit that applies to you.
Additional income from dividends
After retirement, seniors have no regular source of income to rely on. Therefore, it is important to set up additional and alternative sources of income to support yourself after retirement. Again, the stock market can help you. You can invest in dividend stocks or mutual funds for additional income.
Wealth accumulation for the time after retirement
While the stock market carries higher risk, it also has the potential to offer higher returns than most other asset classes. This wealth-building potential can be beneficial to your life goals after retirement. By getting higher returns, you can go on that extended tour you want or start your own business from home without financial compromises.
Seniors who want to invest in the markets need to know that it’s not about avoiding risk altogether. Instead, it’s about managing market risk most effectively. Here are some tips to help seasoned investors navigate the markets with confidence.
Diversify your portfolio
While stock investments are volatile, it is possible to reduce the overall risk in your investment portfolio, and diversification is key to achieving this goal. The right diversification strategy protects your investments from market fluctuations. As you approach retirement age, a higher exposure to fixed income and a modest dose of equities would be ideal.
An example of a diversified portfolio is as follows: 30% in fixed income; 20% in gold; 30% in pensions and 20% in stocks. Although this portfolio has equity exposure, the overall risk is negligible due to the allocation of capital across asset classes.
Pooled Investment Opportunities
If you want to further reduce your portfolio risk without jeopardizing your stock investments, you can opt for the pooled investment route. In other words, you can add stock mutual funds to your portfolio. These funds pool capital from different investors and invest that money in different stocks. Equity funds can be large-cap, mid-cap, small-cap, dividend-paying, or growth-oriented funds. This approach inherently diversifies your stock investments. In addition, the professional management of mutual funds ensures access to first-class research for safer market investments.
Enlist the help of a financial expert
A financial professional can help older investors make more informed investment decisions. So if you’re unsure about which stocks to invest in, you can always enlist the help of an expert. A professional can point you in the right direction and help tie your investments to your life goals after retirement.
The bottom line is that seniors can invest in the stock market just like any other investor. Although the stock market can be risky, if you are careful and have the right investment plan, there shouldn’t be a problem. All it takes is the right approach to make the markets work for you, even as you approach your 60s.