MF Query Board

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Which mutual funds can be recommended to retirees as an alternative to recurring deposits and fixed deposits?
 - Anish Jain

The average interest rate on recurring deposits (RDs) and fixed deposits (FDs) offered by banks is 5.9 per cent with a maximum rate of interest of 7.25 per cent. Since you haven’t specified the corpus, let us suppose that you are 60 years old, have saved Rs1crore for retirement, your monthly expenses are Rs50,000 and general inflation is set at 7 per cent. We assume a life expectancy of 90 years. As a result, your goal would be to live on Rs1 crore while spending only Rs50,000 every month. Further, you would put Rs1 crore in a bank FD at a rate of 6 per cent.

As a result, with this arrangement, back of the envelope calculation shows that you can financially survive only for 74 years. However, we have not taken into account any additional expenses such as healthcare, spending on your hobbies, leaving wealth for your children, and so on. Furthermore, by investing in bank FDs or even RDs, you are getting a negative real rate of return. A negative real rate of return eats your wealth. As a result, develop a bucket strategy and invest in mutual funds. You can use a bucket strategy to have different investment buckets with varying time horizons.

Assume you have three buckets: one for short-term (0-5 years), one for medium-term (6-15 years) and one for long-term (more than 15 years). So, for the short-term bucket, your portfolio would entirely comprise debt mutual funds. Your medium-term portfolio should have a decent mix of equity and debt mutual funds while your long-term portfolio should be more tilted towards equity-based mutual funds. Following this method will assist you in beating inflation as well as managing your corpus in a more defined manner. As a result, we recommend that you have a retirement plan in place.

I want to invest through a SIP. However, I have discovered that a weekly SIP is also possible. So, which is better in terms of returns: weekly SIP or monthly SIP?
 - Rashmi Khemani

A systematic investment plan (SIP) not only helps you instil investment discipline but also helps you cut out short-term market swings. Mutual funds provide SIPs for a variety of time periods, including daily, weekly, quarterly and annual. Most investors, like you, are perplexed as to which frequency makes the most sense. To further understand this, we will compare the returns of weekly and monthly SIPs of Nifty 500 Total Returns Index (TRI). We have collected data from December 2001 to November 2021 for our study and separated it into five-year periods: 2001 to 2006, 2006 to 2011, 2011 to 2016 and 2016 to 2021. The following table gives you the SIP returns:

The outcome of this investigation is that returns do not differ considerably enough to proclaim a single frequency as preferable. While stock markets are volatile, they do not move widely enough or frequently enough on a daily or weekly basis to allow for improved cost averaging. Aside from that, the benefit of any day-to-day falls is usually offset by investments made when markets rise on a daily basis. Let us assume that you invest Rs10,000 every week in the Nifty 500 TRI from December 2016 to November 2021. Your total investment will be Rs24,90,000. The value of your investment in November 2021 will be Rs39,60,210, with an 18.8 per cent SIP return. Now, if you substitute the weekly SIP of Rs10,000 with a monthly SIP of Rs41,500 so that the total amount invested remains at Rs24,90,000, the final value as of November 2021 will be Rs39,86,243, with an 18.9 per cent SIP return.

That is a 0.1 per cent advantage for the monthly SIP over the weekly SIP. The table above clearly demonstrates that there are minimal changes in the comparative SIP returns of weekly and monthly SIP frequencies based on the time period under consideration. As a result, we may infer that increasing the frequency of SIPs provides no apparent benefit to discuss whether a weekly SIP is better than a monthly SIP. When markets are trending lower – which is when you can genuinely average costs down – a monthly SIP is sufficient to capture that trend.

If market corrections are brief, SIPs of any frequency will not assist cutting investment costs. If you want to emphasise the importance of catching markets at lower levels, it’s preferable to do so with a few lump sum investments that employ surpluses to enhance the SIP averaging. Hence, it makes total sense to continue with monthly investments because they are easier to track and, if you are a salaried individual, it is easier to handle monthly SIPs than weekly SIPs. This is because any SIP default is treated similarly to a cheque bounce, for which investors might have to pay a penalty.