Let’s take the example of 2 Senior Citizen friends who have the same amount of corpus in their retirement kitty. The retirement corpus is around 1.4 Crores. Let us name them Mr. Ram and Mr. Sham for better understanding.
Both friends are 60 years old and have retired from their respective professions. Since Mr. Ram used to work in a government organization, he would be receiving a monthly pension of 30,000. While Mr. Sham would not be getting any pension as he used to work in a private organization.
Both of them want a provision for Post retirement monthly expenses of 50,000 as per today’s cost trends. Now, if we assume both have a life expectancy of 85 years. How much corpus would be required for both to sustain till age 85 with monthly expenses of 50,000? Of course, inflation-adjusted monthly expenses of 50,000 (assuming an inflation rate of 6%).
About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in. Ajay is part of the freefincal list of fee-only advisors and fee-only India.
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Suppose we assume a 1% rate of returns above inflation. In other words, inflation is 6% and the rate of returns on investments is 7%. The corpus required in such a case would be as follows:
Mr. Ram would require 53 Lakhs to sustain till age 85. On the other hand, Mr. Sham would require 134 Lakhs in his retirement kitty for the same.
The reason why Mr. Ram would require 53 Lakhs is due to the monthly pension of 30,000 he’s receiving(assuming pension is inflation adjusted).
Now is there any all-in-one investment solution for both these cases? The answer is NO.
Mr. Ram has an additional amount of 87 Lakhs and he is in the position to take a financial risk. Whereas Mr. Sham needs to be ultra-secure and extra-cautious with his investments.
That’s precisely the reason why There are no best investment options for Senior Citizens in India.
First, you need to find the corpus required for your retirement needs and then decide upon the various investment options.
If your corpus is lower than what is required, you should be careful before parking your funds into any avenue. Moreover, you should not run after investments like equity mutual funds or stocks which can offer relatively higher returns. This can backfire on you! Yes, some part of the investments can still be in equity. But that’s only to get 1% returns above inflation and not to cover the deficit amount in your retirement corpus.
Now coming back to the main point, what are the investment options for Senior Citizens in India?
It depends, what are you exactly looking for? Capital protection with the regular income is the most important criterion for Senior Citizens.
Investment Options for Senior Citizens
Take a look at the list of Best Investment Options for Senior Citizens in India
- Senior Citizens Savings Scheme (SCSS)
- Post Office Monthly Income Scheme (POMIS)
- Annuities/Pension Products
- Public Provident Fund (PPF)
- Fixed Deposits (FDs)
- NSCs
- Equity Mutual Funds
- Debt Mutual Funds
- Health Insurance
Senior Citizens Savings Scheme (SCSS)
Eligibility – An individual aged 60 and above can invest in this scheme. People who have opted for voluntary retirement (above age 55) can also invest in this scheme. The condition is that they must make the investment within one month of taking voluntary retirement. Retired Defense Employees above 50 years of age and below 60 years of age, subject to the condition that investment be made within 1 month of receipt of retirement benefits.
Investment – Maximum investment in this scheme is 30,00,000.
Advantages – The interest rate is high as compared to other investment options. Plus, the capital is safe as this is a government-backed scheme. The investment tenure in this scheme is 5 years which can be further extended up to 3 more years.
The interest rate keeps on changing on a quarterly basis. Once you invest the desired amount, the interest rate is fixed for the remaining tenure of 5 years.
Disadvantages – Interest received is taxable and only the quarterly interest is paid. There is no option of monthly, half-yearly and yearly payments. Premature withdrawal is allowed but the facility comes with a penalty.
Post Office Monthly Income Scheme (POMIS)
Eligibility – Any person aged 10 and above can invest in this scheme.
Investment – Maximum investment in this scheme is 9,00,000 for a single account. Whereas in the case of a joint account, the investment limit is 15,00,000.
Advantages – The interest rate is comparable with other investment options and the capital is safe. The investment tenure is 5 years and the maturity amount can be re-invested in the scheme.
You can close the scheme in between the tenure but you’ll be charged with a penalty for it.
Disadvantages – There are no tax benefits under this scheme and the interest received is also taxable.
Annuities/Pension Products
There are some pension/annuity schemes that have been launched by various insurance companies. The only problem with these pension schemes is the low-interest rates that they offer.
Most of the pension products give returns in the range of 5-6% provided that you need your capital back. The 2nd problem is the lock-in period, where the money gets locked in for a long period of time.
Public Provident Fund (PPF)
I am not asking to open a new PPF account for senior citizens. But if you already have a PPF account, you can keep extending it in every block of 5 years – with or without contribution.
Advantages
The beneficial reasons for extending the PPF account:
- The interest rate is higher/comparable to other debt products.
- If you are contributing during the extension period – the amount can be claimed for tax deduction under section 80C.
- Maturity is tax-free.
- Interest earned is tax-free.
- 60% withdrawal is allowed provided that you are contributing during the extension period. 100% withdrawal is also allowed but only if you are not contributing during the extension period.
Disadvantages
Only 1 withdrawal is allowed in a single year after extension. There is no regular income in this product.
Fixed Deposits (FDs)
Fixed deposits are another popular investment choice for Senior Citizens after retirement. In this investment option, the interest rate is a bit higher for the retirees. But still, there are no tax benefits for a regular FD. The interest earned is taxable. Yes, there are options in the 5-year FDs to claim tax benefits under section 80C. However, the amount gets locked for a tenure of 5 years.
Advantages – Higher interest rates for senior citizens and better liquidity than the above-mentioned investment products.
Disadvantages – Interest is taxable. Plus, there are no tax benefits for regular FDs.
Equity Mutual Funds
Equity mutual funds are not meant for regular income. The product is intended for capital growth. The above-mentioned products would not be able to fight inflation in the long term. But how much should you invest in equity mutual funds is the question.
It was precisely the reason; I had quoted the example of Mr. Ram and Mr. Sham in the beginning. If you don’t have any surplus other than the retirement corpus, invest only 20%-30% in the equity mutual funds. This is also a strategy to fight the ever-rising rates of inflation.
Like in the above example, Mr. Sham can invest 25-30 Lakhs in equity mutual funds. And that too only if he can invest it for 10-15 years and has the capacity to take the risk. On the other hand, Mr. Ram can even invest up to 60 Lakhs in equity mutual funds. The reason’s that he has an extra corpus of 87 Lakhs in addition to the retirement corpus of 53 Lakhs.
If a retiree has never invested in equity mutual funds before, it is always better to avoid.
Debt Mutual Funds
Debt mutual funds and FDs almost give the same kind of returns during this point in time. The only apparent advantage of investing in debt mutual funds is taxation. You need to pay taxes on the interest earned from fixed deposits (FDs) every year, whereas, for debt mutual funds, taxes are only payable on the returns when you withdraw your investment.
But debt mutual funds are much riskier than FDs.
NSCs
If you’ve some extra amount which you can lock in for the next 5 years, NSCs aren’t a bad option.
The interest rates are better Besides, the invested amount can be claimed for tax deduction under Section 80C. Since the interest is re-invested, it’s also eligible for deduction under Section 80C. The final interest payout is taxable.
Health Insurance
Although you can say that the premium paid towards health insurance is an expense, I’d rather consider it an investment. Reason being, even one instance of hospitalization can put a big dent in your retirement corpus.
On this account, it’s always better to take a health insurance policy for senior citizens.
What is your view on investment options for Senior Citizens?
*Disclaimer- Nothing contained in the article is a solicitation, recommendation, endorsement, or offer by me. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.