Last Updated on August 30, 2021 at 4:19 pm
The RBI has cut interest rates thrice this year. On the one hand, this has made those who are using equity to accumulate wealth happy, as it could mean the start of a bull market driven by growth and not hope. On the other hand, this development has worried senior citizens who are used to the comfort of “high-interest rate” fixed deposits.
“The banks has slashed FD rates. Where else can I invest now?” is a question being asked by many senior citizens today. This is a discussion on investment options available for senior citizens in a low-interest rate regime.
This is a dangerous area to tread on. One mistake and the senior citizens net worth will take a hit. Many senior citizens want piece-meal solutions to this issue and refuse to take a holistic view of the matter.
If someone is looking
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
- for an alternative fixed deposits for the first time in their lives, they need to understand the risk vs reward equation for different fixed-income instruments in some detail before proceeding.
- at equity as an alternative to fixed deposits, then they should stop looking!
- at debt funds to ‘get more’, they should recognise how volatile they can (observe annual returns at value research for any debt which has been around for about 10Y)
- to increase equity exposure in the hope of a bull run, they should check if they have a large enough corpus to take on such a risk
I could go on and on.
How much volatility a senior citizens portfolio ought to stomach (assuming the appetite is high) is an extremely tricky subject. The current withdrawal rate is often cited to set up a thumb rule.
Current withdrawal rate = expected annual expenses/current portfolio value.
If you have an assured pension then you could write
Current withdrawal rate = (expected annual expenses- pension after tax)/current portfolio value.
Portfolio here refers to your investment other than your pension or the amount used to purchase the annuity.
Is is for these investments that an alternative is being sought for.
If this is 3-4%, a reasonable amount of volatility is generally acceptable.
5-7% some volatility is ‘okay’, but how much is ‘some’ is hard to ascertain. It is a ‘cat on the wall’ situation.
Anything above that implies the corpus is too small and is fit only to generate a fixed annuity.
A detailed explanation with a calculator is available here When should senior citizens purchase an annuity?
A more generic investment options for senior citizens has been published before.
In this post, I would like to focus on fixed deposit alternatives for those who do not have much experience with mutual funds. If you need professional help, consult a fee-only financial advisor.
If you want truly fixed income then you will need to lock up your money: Thensenior citizens savings scheme can be a decent option. However, one can invest only up to 15 Lakhs. The payout is quarterly and is taxable as per slab. As Ashal pointed out at FB group, Asan Ideas for Wealth, get this from the bank and not post office.
Equity Mutual Funds Stay away unless your withdrawal rate is low enough.
Co-operative bank and corporate fixed deposits Stay away
Debt mutual funds:
Fixed income products like a fixed deposit or recurring deposit or a bond which is not sold in the secondary market are extremely simple to understand. Simply because they are truly fixed income products. Take such a product and allow it be traded in the market, its value will change on a day to day basis.
Its value can increase or decrease sharply when interests rates change or when the credit rating of the issuer changes.
Read more: to understand the impact of these changes in detail from these posts:
Understanding Interest Rate Risk in Debt Mutual Funds
Understanding Credit Rating Risk in Debt Mutual Funds
Debt Mutual Funds: Risk vs. Reward
Lessons from the JP Morgan – Amtek Auto Debacle
Investing in debt mutual funds: slow and steady wins the race!
Now the upshot of these posts for first-time debt mutual fund investors is this:
- stick to so-called ultra-short term funds which invests in short-term (few months) bonds of banks, PSUs and high-rated companies. You can consider short-term banking and PSU funds if you don’t want to take on credit risk from corporate bonds
- As Mr. Raghu Ramamurthy (my oldest patron at 87) often mentions, short-term gilt funds are more than a decent alternative to those who do not want to expose their portfolios to credit risk. However, the NAV of such funds can fall and be in the red for at least a few weeks if there is a sudden increase in interest rates. Read more: Comparison: Short-term gilt vs. long-term gilt vs. Ultra short-term mutual funds
- Stay from corporate bond funds or at least do not have significant exposure to them. If you like corporate bond funds, stick to established AMCs like Franklin which will not have too much exposure to a single bond (something that JP Morgan did)
- Stay away from monthly income plans. There are not for income!! One need to stay invested for 5+ years (preferably 7Y) to see ‘decent’ returns.
- Stay away from long-term gilt funds. They are for trading.
- Never forget that past performance cannot sustain in debt funds. Just like FD rates, their returns are cyclic too. So do not expect too much more return.
I have assumed that you are in the 20% or 30% slab. For those in 10% slab, a debt mutual fund is not tax efficient.
Arbitrage mutual funds or equity savings funds can offer anywhere between 6-8% returns which are tax-free if held for over one year. A small exposure to such funds is not a terrible idea.
This is as far as my thinking takes me.
Conclusion: There is no free lunch. Simple products would offer low returns (senior citizens savings scheme is an exemption), would be taxed as per slab and will have a lock-in.
Products will better taxation, liquidity and potential for better returns will come volatility tagged. Selection requires study.
Caution: If an advisor suggests a complete overhaul in your portfolio, get a second opinion. Do not proceed blindly.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)