Planning investments is a challenge for everyone, and more so for senior citizens.
Choosing the right investment product per se is a difficult task for many investors. The task is even more challenging for senior citizens as they will have a limited corpus, while their need for income from the corpus does not remain constant. While a pension plan takes care of a regular source of income, life is not easy if the investor does not have a regular source of income. As a result, senior citizens have to do the balancing act between risk and returns. Needless to say, the risk element has to be as low as possible for this class of investors.
Safety over returns
As pointed out earlier, safety of capital has to be the underlying principle of investments, and risk can be a component only when the investor has the comfort of liquidity. For instance, the monthly income needs have to be met through fixed return products.
Some fixed return products
- Senior citizens’ savings schemes:
This has been the natural choice for many as they assure nine percent returns and have the backing of the government. However, there is a cap of Rs 15 lakhs for the corpus. Hence, an investor can earn only an annual income of Rs 1.35 lakhs from this saving. This in turn relates to a monthly income of close to Rs 11,000.
- Post office monthly income schemes:
Another traditional product, but the interest has slipped to eight percent in recent times. In the current scenario, this may not be an attractive option as bank deposits offer higher returns - in the range of nine percent. Hence, keep a track of alternate options and if the pre-closure penalty is not applicable, you can look at the option of shifting your funds from this product to another.
- Monthly income plans (MIP):
Mutual funds too offer MIPs but they carry an element of risk as a portion of the fund is invested in equity. The allocation towards equity varies and hence investors can choose according to their comfort. For instance, during the early stage of retirement, the equity component can be 20 percent and it can be shifted to an MIP with 10 percent allocation at a later stage.
While mutual funds MIPs provide the opportunity of higher returns and capital appreciation, they also carry risk of capital reduction. So, look at MIP only if you are comfortable with your liquidity for monthly expenses and the surplus can be parked in MIPs.
- Fixed and bank deposits:
These are the most popular options but due to the tax on the interest, you have to be careful while parking funds in this product. Though senior citizens earn a higher interest income and there is a tax free limit, a fixed deposit is one of the tax inefficient products. Hence, an investor has to keep in mind the tax angle while allocating funds for a FD. Irrespective of the corpus, park your FD with banks that have good credit rating as FD is an unsecured liability and in the event of closure of the organisation, the investor can be in trouble.
