Where should a 66-year-old invest with a five-year horizon?

My 66-year-old aunt, who is still working at a private school, received ₹18 lakh last year from the sale of our ancestral property. She doesn’t need this amount for three to five years. Could you suggest the best investment options for her to ensure the growth and safety of her funds?

-Name withheld on request

To recommend suitable investment options, understanding the individual’s risk appetite and financial goals is very important. Given your aunt’s age (66 years), continuous income from her teaching job, and the desire to invest ₹18 lakh for a period of three to five years with an emphasis on safety and growth, the following options are ideal:

1. Corporate fixed deposits (FDs)

Considering age and risk appetite, FDs are the safest option to invest in, yielding good returns for different tenures. Also, as a woman senior citizen, the rates are higher than those of a normal individual.

• Suitability: These offer a safe investment avenue with higher interest rates for senior citizens.
• Returns: Typically provide fixed returns ranging between 7-10% depending on the tenure and institution.
• Liquidity: Flexible tenures and premature withdrawal options are available (though with a penalty).
• Recommendation: Opt for AAA-rated corporate FDs to ensure safety.

2. Debt mutual funds

You can consider investing in debt mutual funds as we are currently in an interest rate reversal cycle. So, this investment will be safe and, at the same time, will be able to generate good capital gains. It will also allow you to set systematic withdrawals from an investment after three to five years when the monthly passive income is required.

• Suitability: Offer stable returns with lower risk compared to equity investments.
• Types: Short- to medium-duration funds align well with the three-to-five-year investment horizon.
• Systematic withdrawals: Systematic withdrawals can ensure a steady passive income after three to five years when the monthly income is required.
• Interest rate benefit: As the underlying asset is bond investments, debt mutual funds will also generate capital gains given interest rate reversal and sold at the right time.

3. Conservative hybrid mutual funds

Investment in this category of mutual fund provides the investors an opportunity to invest primarily in debt and money market instruments and secondarily in equity and equity-related instruments. Ideal ratio of debt to equity would be 70:30.

• Suitability: These funds invest primarily in debt instruments (around 70%) and a small portion in equities (around 30%), providing a balance of safety and growth.
• Returns: Potential for slightly higher returns than pure debt investments due to equity exposure.
• Risk mitigation: Lower volatility due to the conservative debt allocation.

Additionally, from a tax perspective, taxation on all above investments is as per the slab rate, so if your aunt’s income doesn’t come under the taxable income slab or a lower slab, then these will be tax-efficient investments in comparison with equity investments where the tax rate is fixed.

Proposed investment split:

• Corporate FDs: 55.55% ( ₹10 lakh)-Expected RoI 10% for women senior citizens.
• Debt mutual funds: 22.22% ( ₹4 lakh)-Expected RoI 8%
• Conservative hybrid funds: 25% ( ₹4.5 lakh)-Expected RoI 9.5%

With cumulative returns on the debt mutual funds and conservative hybrid mutual funds, plus the corporate FD, your aunt’s ₹18 lakh investment will grow to ₹27.96 lakh in five years, generating a total return of ₹9.96 lakh, with an effective annual yield of approximately 10.9%. 

This diversified approach balances safety, liquidity, and growth, ensuring your aunt’s funds are secure while offering a steady return over the next three to five years.