Ravi Subramanian has just retired after a 35 year stint at a private company and has received a hefty corpus of Rs.60 lakhs as his retirement benefits. His big challenge is to utilize these funds in such a way as to protect his principal and also to earn regular income. What are the options available in front of him? Actually, there are 5 broad investment options that Ravi can actually consider. Let us look at each of these options and the pros and cons of the same. Remember, as a retiree you need to look at safety of principal, regularity of income, liquidity of your corpus for emergencies and also the tax efficiency..
Senior Citizens Savings Scheme (SCSS)..
This is a special scheme that is designed for elderly citizens who need to ensure safety of principal and also regular income. The SCSS is specially designed for this purpose. The SCSS can be availed through a bank or through a post office provided the person has crossed the age of 60. Early retirees can invest in SCSS provided they do it within 1 month of retirement. The SCSS has a basic maturity of 5 years and then it can be continuously extended for periods of 3 years each. The SCSS currently pays an interest of 8.6% and is payable quarter. Thus if you invest a corpus of Rs.15 lakhs in the SCSS, it will result in a quarterly income of around Rs.43,000. This monthly income of Rs.14,333 will be sufficient to cover your regular monthly expenses assuming that you do not have any debt outstanding. Remember, the SCSS has an upper limit of Rs.15,00,000 and you are permitted to open more than 1 account and spread the corpus. While investment in SCSS is eligible for tax rebate under Section 80C of the IT Act, the interest will be taxable in your hand. The advantage of the SCSS is that it has a sovereign guarantee and hence the default risk is nil.
Bank Fixed Deposits (FDs)..
Like the SCSS, the bank FD also has a quasi government guarantee and is fully secure. The advantage is that as a senior citizen, you get an additional interest of 0.5%. So if the standard rate on a bank FD is 7.5% then as a senior citizen you can earn up to 8%. If you are in the low tax bracket, then this is a very good product for you. That is because the interest paid on bank FDs is fully taxable. There are also tax saving FDs that give you benefits of Section 80C but that comes with a 5 year lock-in and it does not add value if you have already invested in SCSS. You can choose tenure of 1-3 years for your FD and you can also take a loan against such FDs.
Post Office Monthly Income Scheme (POMIS)..
The POMIS can be opened at any post office. You can invest up to Rs.4.5 lakhs in single names and Rs.9 lakhs in joint names. The current rate of interest payable on POMIS is 7.8% but there is no Section 80C benefit available and the interest is entirely taxable in your hand. The interest is payable on a monthly basis and hence it is good to take care of your monthly needs of cash. POMIS is an assured return scheme and the principal risk is virtually Nil. The rate of interest is announced by the government from time to time.
Equity and Debt Schemes of mutual funds..
The big question is whether retired persons can invest in equity funds. Remember equity funds can provide wealth creation in the long run but debt funds provide stability and regularity of income. The best strategy for a retiree is to opt for a combination of the two. A retired person has 2 options. He can either look at a balanced fund that is predominantly into equities or they can also look at an MIP which predominantly invests in debt. In fact, MIP is a monthly payout plan and hence would suit retirees a good deal. The advantage with a MIP is that it gives higher returns than a debt fund due to its equity exposure. It is also better than an FD because the dividends on a debt fund or MIP are entirely tax free in the hands of the retired person. There is a small risk of market fluctuations but this is the risk that a retiree must take on with 20% of his portfolio so that added alpha can be earned without compromising on the safety and the security of the overall portfolio.
Tax free bonds make a lot of sense for HNI retirees..
If you have a fairly large taxable income post retirement then you need to be cautious about the taxability of the interest earned on your investments. Tax-free bonds issued by infrastructure companies like REC, NHAI, HUDCO and IRFC can be an answer to your problem. These are government-backed bonds and hence there is zero default risk. So, you money is safe. However, there is a lock-in period of 10-15 years and hence you should opt for these bonds only when you do not require the liquidity. The rate of interest may be slightly lower but the interest earned on these bonds is fully tax-free in your hands. That is the beauty of these tax-free bonds.
As a retiree you need to combine safety with regular income. Of course, a small component of equity is a must since it adds that additional alpha into your portfolio. You surely have a choice!