| The FD option for retirees |
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Investing for retirees can be a tricky proposition. Since retirees have no alternative sources of income like salary to fall back upon, ensuring that the investments provide for regular and stable income becomes pertinent. There is also a need to ensure that capital preservation is given the highest priority. Hence assured return schemes should typically occupy a larger portion of the portfolio vis-à-vis high risk-high return avenues like equities/equity-oriented funds. Given the constraints, retirees have a limited number of options to choose from.
Investment avenues like the Senior Citizens Savings Scheme (SCSS) and Post Office Monthly Income Scheme (POMIS) often feature as the usual suspects in retirees’ portfolios. However, these schemes have capped upper investment limits. Notwithstanding, the high safety levels they afford, it would make sense from the diversification perspective to invest in other avenues that are not from the small savings segment.
Monthly income plans from fixed deposits (FDs) emerge as a viable option. Conventionally, FDs have been popular investment avenues among investors. However their poor showing on the liquidity front has been a bit of a dampener. FDs with a monthly income option eliminate this shortcoming. Furthermore, rising interest rates have made FDs attractive investment options in recent times.
Fixed Deposit: Monthly Income
Plan
| Period
(Months) |
Interest
rate (per annum) |
| 12 - 59 |
7.25% |
| 60 - 84 |
7.50% |
(Source: www.hdfc.com.
Interest rates as on June 28, 2006.)
As can be seen in the table, the monthly income plan from HDFC Limited offers a return of 7.50% over a 5 year period. Furthermore for senior citizens (which most retirees are likely to be), an additional 0.25% is paid. Hence the applicable interest rates would be 7.50% and 7.75% for the 12-59 month period and 60-84 month period respectively.
The investment carries an “AAA” rating, which indicates the highest degree of safety. Hence the criterion of capital preservation is not being compromised with.
Critics might argue that investors are better off investing in the SCSS (9.00% pa) and POMIS (8.00% pa), which offer higher returns vis-à-vis the FD monthly income plan. However, the latter scores better on the liquidity front. For example, investments in SCSS and POMIS can only be liquidated after completion of 1 year from the date of deposit; the FD monthly income plan can be liquidated after completion of 3 months.
Similarly, while premature encashments from SCSS and POMIS entail a loss of the principal amount invested, in the FD monthly income plan, the investor only suffers a loss of interest which is recovered from the sum invested.
With the omission of Section 80L, there is parity among the investment avenues in terms of taxability of interest income.
As mentioned earlier, for investors whose portfolio is lop-sided in favour of schemes from the small savings segment, investing in the FD monthly income plan is an opportunity to diversify across segments as well.
Our advice – if you are retired and are investing to build a portfolio that can provide you with regular income, FDs with a monthly income option should feature therein.
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