When it comes to investment strategy, we normally tend to straitjacket people based on the age. There is the famous (100-age) rule which says that if you are 30 years old then 70% of your corpus must be in equities and if you are 60 years old then only 40% of your corpus must be in equities. Of course, that is a very simplistic explanation and the reality can be a lot more complex. But it is broadly correct in indicating that as you age your risk appetite reduces and as your life goals are already met, the need to take additional risk also reduces. For example, if a 35 year old planning for retirement, child’s education and his child’s wedding then the investment strategy will surely have to be aggressive. On the other hand, a 60 year person whose retirement is provided for, whose kids are settled and is also debt-free does not need to take additional risk. For him, regular income and the security of this income matter a lot more.
So, what exactly are the senior citizen investment options available currently? Do they have to stick to traditional debt products or can they also look at hybrids? What is the mantra or the investment advice for senior citizens? Can they invest in mutual funds and if so, what is the best mutual fund for senior citizens in India?
1. Senior Citizens Savings Schemes (SCSS)
Considering that you are already above 60 years of age, the SCSS is a must have in your portfolio. The SCSS can be purchased by anyone above the age of 60 from the nearest bank or post office. If you retired early then you can still invest in the SCSS provided you invest within a period of 1 month of receiving your corpus. The upper limit for investment is Rs.15 lakhs and has tenure of 5 years, which can be later extended by 3 years. The SCSS pays an attractive interest rate of 8.6% which is paid quarterly, thus raising the effective yield to 8.88%. The instrument has a sovereign guarantee and that makes it free of default risk. If you are liable for tax payments then you can claim benefits under Section 80C in the year of investment. Partial withdrawal is also permitted.
2. Safe products like POMIS and Bank FDs
The Post Office Monthly Scheme (POMIS) permits senior citizens to invest up to Rs.9 lakh in joint-names and Rs.4.50 lakhs in individual names. The interest rate is 7.80% and is payable monthly which makes it attractive for those who are looking at monthly income for meeting their expenses. Like in case of SCSS, the interest is taxable in the hands of the individual. Another option, and extremely popular is the Bank FD. While FD rates are around 7.5%, senior citizens get a premium of 25 basis points. Also you can opt for a long term 5-year FD to get Section 80C tax exemptions. FDs are also indirectly liquid in the sense that you can get loan from the bank up to 90% of the FD amount at very short notice. For a long time the POMIS and the banks FDs have been the hot favourites of senior citizens.
3. MIPs and FMPs of Mutual funds
Monthly income plans are normally debt mutual funds which invest in safe government debt but pay out the gains on a monthly basis. MIPs are normally hybrid funds and have a small component of 20-25% in equities to enhance returns. The condition is that dividends on MIP can only be paid out of returns and not out of capital. These returns can arise in the form of interest on bonds, profits on bonds, dividends on equities or trading profits on equities. A different form of a debt fund is the Fixed Maturity Plan (FMP) which comes from 366 days onwards. Here you almost get assured returns since the tenure of the bonds matches with the tenure of the FMP. Also the (3 years + 1 day) tenure of the FMP can give you four year indexation benefits with 3 year holding, making it more tax efficient.
4. Systematic Withdrawal Plans of mutual funds
These are a mix of debt and short term funds that pay out a fixed sum of money regularly. To that extent the no. of units get redeemed from the account. The capital gains will only be calculated on the non-principal portion which makes it more tax efficient. This SWP can be very useful for those senior citizens who are looking at a tax efficient way of getting regular income from their investments.
5. Tax-Free Bonds
Tax free bonds are typically issued by infrastructure companies like IRFC, IRCON, REC, NHAI etc to raise funds from the market at rates that are subsidized by the government. The interest component is entirely tax-free and hence investors do not need to worry about any TDS deducted on their interest income. Due to their tax benefits, the tax free bonds command lower rates of interest, which is normally around 6%. But such bonds will mature after 10 years and above and there will be no liquidity in that interim period. The interest will, of course, be paid to you an annual basis. Senior citizens can opt for this instrument fully aware of its liquidity limitations.
6. Immediate Annuity Schemes
Finally, there is the Immediate Annuity Scheme (IAS) provided by many insurance companies which can be looked at by senior citizens as a serious option. The good thing is that the pension or annuity income is around 6% of the corpus but there is no mention of the redemption of the corpus. If you can take your own portfolio decisions, this is not suited to you.
The reality is that even if you are over 60, you have a wide array of choices available in front of you. It is yours for the asking!
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