Senior citizens are in for the roughest time. Some who invest in equities have seen their portfolio incurring big losses and rest who are invested in small savings schemes and other fixed income or debt products will see return declining due to falling interest rates. The Union Government has revised interest rates on small savings schemes downwards after the Reserve Bank of India reduced the policy rate by 75 basis points. As the economy is unlikely to recover from the low interest regime any time soon, senior citizens need to take stock of their investments. We tell you where all you can invest in the current scenario to get the best returns with least risk:
Senior Citizen Savings Schemes
Even as the interest rate on senior citizen savings schemes (SCSS) has been reduced to 7.4 per cent for the June quarter from 8.6 per cent for the March quarter, it is still earning more than other fixed income options. You can invest maximum Rs 15 lakh in SCSS in multiples of Rs 1,000. Interest is payable each quarter that you can use as regular income. The account matures in five years and you can extend it once for a block of three years. Premature withdrawal is allowed but with a penalty of up to 1.5 per cent of the deposit amount.
"SCSS is a long-term savings scheme which offers security as well as other additional benefits to retired individuals and senior citizens. The SCSS can be availed from recognised banks and post offices around the country. Also, the rate of interest offered on this scheme is higher than that of the regular bank savings and fixed deposits. Subscribers are also eligible to avail tax benefits up to Rs 1.5 lakh under Section 80C of the I-T Act, 1961," says Archit Gupta, Founder & CEO at ClearTax.
Post Office Monthly Income Scheme
If you want a steady monthly income, Post Office Monthly Income Scheme (POMIS) is a good option that currently offers 6.60 per cent interest. The minimum investment amount is Rs 1,000 and the maximum is Rs 4.5 lakh for a single account and Rs 9 lakh for a joint account. You need to open a savings account with the post office where you sign up for the scheme so that the monthly interest can be auto-credited in the savings account. The scheme comes with a maturity of five years and premature withdrawals attract penalty of up to 2 per cent of the deposit amount. Note that investment in POMIS does not offer any tax rebate under I-T Act, so while no TDS is deducted, the interest income is taxable in your hands.
Government of India Savings (Taxable) Bonds
GoI Savings (Taxable) Bonds, also called RBI bonds, come with sovereign guarantee with no risk to your principal amount. The rate of interest on GoI Bonds is 7.75 per cent with two payout options -- non-cumulative option offers interest on half yearly basis, while cumulative option pays interest on maturity. "There is no upper limit of investment in GoI Bonds but the returns are taxable as per your slab," says certified financial planner Pankaaj Maalde.
Although the tenure is seven years, the lock-in period is relaxed for senior citizens. It is six, five and four years, respectively, for investors in the age bracket of 60-70 years, 70-80 years and above 80 years. "Currently among all fixed income options, RBI bonds are offering the highest interest rate. If you want to avoid volatility risk present in debt mutual funds, RBI bonds are the best option offering 100 per cent safety," says Maalde.
Senior citizens should consider overnight and liquid funds for the money they may require anytime. Alternatively, they can invest in short-term debt funds having AAA-rated papers. "Choose well-managed debt funds. Go for short-term debt funds because bond yields have fallen sharply following the rate cut by RBI. They may not fall any further so long duration and medium duration bonds could yield negative returns in the coming months," says Raj Khosla Founder and Managing Director, Mymoneymantra.com.
Debt funds offer an average return of 8-10 per cent typically, says Gupta of Cleartax. However, these are taxed as per your slab rate.
The issue with debt funds is there are many to choose from and not all are risk free. "Looking at the current scenario it is not advisable to invest in debt funds looking at high yields. Already people have burnt their fingers in defaults and downgrades of various bonds," says Maalde. Take assistance from a financial advisor if selecting a debt fund appears cumbersome.
Bank deposits and corporate deposits
It is advisable to maintain some amount of cash in bank deposits for emergencies even though interest rates are not appealing. The State Bank of India has recently reduced deposits rates across all tenors. Senior citizens, who earn extra 50 basis point interest on bank deposits, will now receive 4-6 per cent interest on FDs maturing in seven days to 10 years. "Interest income on fixed deposits up to Rs 50,000 during a financial year is completely tax-free for senior citizens under Section 80TTB of the I-T Act," says Gupta.
Corporate deposits are another attractive investment option. "The deposits of HDFC and Bajaj Finance and other such housing finance with good credit ratings can be considered to diversify the portfolio. They will give 0.50 to 0.75 per cent more than the banks. Taxation needs to be taken into account before investing," advises Maalde.
If you are in the highest tax bracket and looking for a tax efficient investment option, tax-free bonds should top the charts. Public sector undertakings such as IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC and Indian Renewable Energy Development Agency (IREDA) offer such bonds. These bonds typically come with a tenure of 10 years, 15 years and 20 years, but can be sold before maturity in the secondary market. You can buy these bonds either in the physical form or through demat account. Currently no such bonds are available in the primary market. You will have to wait for the public issue of these bonds and you can apply physically or online if you have a demat account. However, these bonds are also available in the secondary market and may come at a premium due to falling interest rate. These are listed both on the BSE and NSE from where you can buy.
Stocks and mutual funds
If your goal is to accumulate wealth and leave a legacy for your children, you may invest in equities for higher returns. After the recent market crash, most of bluechip stocks are available at attractive valuations. "Look for stocks of companies with strong fundamentals. The core idea should be to find companies that will survive an economic recession. Talking about mutual funds, a diversified equity fund with a focus on large-caps and/or bluechips seems like a good option," advises Harsh Jain, Co-founder, and COO, Groww.
If your debt portion has gone beyond your targets in your portfolio, you can book profits and divert the amount in equities via systemic transfer plan (STP). "You can put 20 per cent of the portfolio in the equity via STP of 12 months with a time horizon of five-six years. Index funds are good option for senior citizens as they invest in large and quality companies," says Maalde.
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