If you are already retired, what you really need is a retirement solution. Let’s begin by discussing the uniqueness associated with building a portfolio for retirees.
Firstly, the importance of capital preservation gets magnified manifold. The retirement corpus at the investor’s disposal has to provide for him henceforth. Hence high-risk investment avenues like equities or equity funds should either be excluded or be allocated a very modest portion of the portfolio.
Liquidity assumes significant importance. With no alternate options like salary or business income to fall back upon, the portfolio should be structured in such a manner that it grants a high degree of liquidity to the investor.So, now let us discuss the various investment options available to retirees and find out how they measure up.
Senior Citizens Savings Scheme
As the name suggests, the scheme is a dedicated investment option for senior citizens i.e. individuals above 60 years of age; those above 55 years are also permitted to invest subject to fulfillment of certain conditions. The minimum investment amount is Rs 1,000 while the upper limit has been capped at Rs 1,500,000.
The scheme runs over a 5-Yr period and offers a return of 9.00% p.a. on a quarterly basis making it the most attractive investment option in the peer group.
Premature encashment is permitted after completion of 1 year from the deposit date. If the investment is liquidated before expiry of 2 years, an amount equal to 1.50% of the deposit balance amount is deducted. A termination after completion of 2 years attracts a penalty of 1.00% of the balance amount.
Post Office Monthly Income Scheme
Another popular investment avenue for investors seeking regular income, POMIS is operated from post offices and offers assured monthly income. The minimum investment amount is Rs 1,500; the upper limits have been set as Rs 4,50,000 and Rs 9,00,000 for single and joint accounts respectively.The investment tenure for POMIS is 6 years and investments earn a return of 8.00% p.a. (payable monthly); also a 5.00% bonus is paid on maturity. The norms for premature withdrawal are rather stringent. Premature withdrawals are permitted after 1 year; however 2.00% of the deposit amount will be deducted if the account is closed on or before expiry of 3 years from the opening of such account. Premature closure of account after 3 years from the opening of such account will attract a deduction of 1.00% of the deposit amount.
Fixed Deposits
Retirees can also consider making investments in fixed deposits schemes are offered by Banks, NBFC’s and Corporates. Our preference is for fixed deposits with a ‘AAA’ rating indicating a high degree of safety. Interest payouts are made on quarterly, semi-annual, annual or cumulative basis (based on the offering) throughout the tenure of investment. Also fixed deposits are known to offer a higher interest rate (generally 0.50% more than the regular rate) to senior citizens, thereby making them attractive investment options.
It is important to note that all fixed deposits do not offer liquidity or premature withdrawal facility. Albeit terms and conditions set by the issuer governing premature encashment, it is generally permitted only after completion of 3 months from the date of deposit. Also liquidating the investment before completion of its stipulated tenure entails loss of interest.
The option mentioned below may be considered by a retiree only if he or she is willing to take that extra bit of risk in pursuit of higher returns.
Monthly Income Plans
Monthly Income Plans typically invest 15%-25% of their corpus in equities and the balance in debt instruments. Investors can choose between the monthly, quarterly, half-yearly and annual dividend payout options or the growth / cumulative option. However it should be understood that on account of their market-linked nature, MIPs expose the investor to higher levels of risk vis-à-vis peers like POMIS and POTD. Also the returns are not assured; neither is there certainty in terms of capital preservation.
On a positive note, MIPs are equipped to deliver superior returns as compared to its assured return peers. Also it scores on the liquidity front as there is no fixed investment tenure (an exit load may be charged if investments are liquidated within 6 months from the investment date). Finally, dividends received from MIPs are tax-free in the investor’s hands, although a dividend distribution tax is indirectly borne by the investor which is held back by the fund house before distribution of dividend.
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