- Date : 07/04/2021
- Read: 5 mins
To benefit from above-average returns, senior citizens must diversify their investments. Here’s why.
Life expectancy in India is growing by leaps and bounds. Today, a person retiring at the age of 60 can expect to live till the age of 80 or beyond. However, given the rise in inflation and falling interest rates, investing in fixed deposits (FDs) is no longer enough.
A report by SBI says more than 4.1 crore Indian senior citizens currently have an aggregate of about Rs 14 lakh crore invested in FDs. Unfortunately, interest rates for FDs have hovered between 5.30% and 6.75% p.a. for the general public, while senior citizens can expect to get 5.80%–7.25%. This is primarily because the RBI has linked the FD interest rate with the repo rate, which is a variable benchmark.
Moreover, the RBI has been consistently cutting the repo rate over the years. For example, the repo rate has been incrementally reduced from 6% in 2018 to 4% today. With every rate cut, the interest rate has fallen further. Financial planners say senior citizens should be looking to diversify their investments in order to get steady returns in the long run.
If you’re a senior citizen, you need to consider both short-term and long-term needs when making investments. This means you need a good mix of liquidity and growth in order to be financially independent after retirement. Secondly, tax liability should also be considered, especially when it comes to short-term investments.
Here are some alternatives to FDs that you can consider to get better returns and beat inflation:
1. Senior Citizens Savings Scheme (SCSS)
As the name suggests, SCSS is meant exclusively for persons over 60. It is guaranteed by the Government of India, which can be an attractive factor for risk-averse investors.
- Tenure: It has a fixed term of 5 years but can be extended by a further 3 years.
- Interest rate: At 7.4%, SCSS currently offers the best interest rate among fixed income instruments. The interest earned is automatically credited every 3 months into your bank account, which makes it ideal for meeting short-term financial needs.
- Risk factor: Once locked in, the interest rate is fixed for the entire term of the deposit. However, the interest rate of returns is revised at every three months and are drawn based on the prevailing economic conditions.
- Tax benefit: You can claim income tax deduction of Rs 1.5 lakh under Section 80C of the Income Tax Act 1961. However, interest income is taxable. Look more in detail to understand why SCSS makes a good addition to retirement planning.
2. Debt mutual funds
If you are in the 20% or 30% tax bracket, debt mutual funds can be an ideal alternative. Returns from debt funds are generally more stable than equity funds over an investment timeline of 3 years or more. This makes them a good investment option for senior citizens.
- Tenure: To get the best possible returns, it is recommended to invest in debt funds for a minimum of 5 years. This is because a longer investment period allows indexation to come into play. However, short-term debt funds like liquid funds can be ideal for investing for the short term.
- Interest rate: Debt funds have been outperforming fixed deposits in terms of returns as interest rates continue their downward trend. The current rate of return from debt funds is 7% to 8.5%.
- Risk factor: Debt funds are subject to interest rate fluctuations and credit risk – that is, you can expect returns based on the performance of the bond market.
- Tax benefit: Long Term Capital Gains (LTCG) tax of 20% is applicable on debt funds redeemed after 3 years. In addition, a 3% cess is also assessed.
- Related: How debt and equity based mutual funds differ in risk
3. Government bonds
As a senior citizen, you can also benefit from investment in tax-free bonds. These are guaranteed by the government, which means assured returns over the long term.
- Tenure: This is a long-term investment option, which is ideal for those with an investment horizon of 10 to 30 years.
- Interest rate: Ranges from 5.50% to 6.50%. While this may seem average, the potential to save tax makes it a worthwhile option. For example, the RBI recently introduced a taxable bond with 7.75% interest. However, post-tax returns are likely to be less when compared with tax-free bonds.
- Risk factor: This is an ideal option to grow the value of your investment as the risk factor is zero.
- Tax benefit: Tax-free bonds are attractive for senior citizens as they do not attract tax. As mentioned earlier, the RBI recently introduced a taxable bond at 7.75% interest, though the post-tax returns are likely to be less than that of tax-free bonds.
4. Post Office Monthly Income Scheme
POMIS has some key advantages for senior citizens, such as a lower lock-in period and capital protection. The maximum amount that can be invested is Rs 4.5 lakh (individual) and Rs 9 lakh (joint account)
- Tenure: The lock-in period for investments in POMIS is 5 years.
- Interest rate: The interest rate has been constant at 6.60% since 2019-20.
- Risk factor: Though returns are assured, there is a penalty for premature withdrawal.
- Tax benefit: TDS is not applicable, but there are no exemptions available under Section 80C either.
To sum up, diversifying your investments can help you avoid market risks while getting better overall returns. Besides this, look at these investment options that are popular among retirees.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.