Safe investments for seniors

Retirement investment planning has acquired urgency in recent times due to the uneasy combination of high inflation (double-digit growth) and weak interest rates (7 to 8 per cent). Investment options on retirement often stand reduced, as capital protection and liquidity start assuming higher priority. Besides, returns post-tax should be able to beat inflation.

Given the thrust on capital protection in retirement planning, fixed income instruments often become the core of any retiree's portfolio. This despite negative returns in the current situation, with inflation rates exceeding returns on fixed income instruments. However, this may not persist for too long. Given below are some popular investment options that may be suitable for the retired or those nearing retirement.
Senior Citizens Savings Scheme
Considered among the best investment options for senior citizens, this scheme offers an interest rate of 9 per cent per annum, with quarterly interest payouts. Individuals above the age of 60 (55 in certain cases of retiring employees) are eligible to make deposits (minimum of Rs 1,000 and up to Rs 15 lakh). The scheme has tenure of five years extendable by three years.
Premature withdrawal is permitted after a year although with penal charges. Deposits under this scheme are eligible for deduction under Section 80C of the Income-Tax Act. Interest payment is taxable and TDS will be applicable, if interest payment exceeds Rs 10,000 annually.
High level of safety (being a government scheme), high liquidity, and attractive interest rates (currently) are the positives of this scheme. The tax sting is a negative. Senior citizens should consider allocating a portion of their corpus to this scheme.
Post Office Monthly Income Scheme
The scheme gives monthly interest payouts at 8 per cent per annum and also entitles depositors to 5 per cent of the deposit amount as bonus at the end of the maturity period of six years. The minimum deposit is Rs 1,500 while the maximum is Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account. While the interest is taxable, TDS is not applicable on returns. Premature withdrawal, albeit with penal charges, is allowed after a year. High safety levels, monthly income flows, and relatively attractive returns make this scheme a good fit in the retirement portfolio.
National Savings Certificate (NSC)
With a return of 8 per cent per annum on a half-yearly compounding basis, the certificate allows individuals to invest a minimum of Rs 500 (no maximum limit) for six years. Interest gets accrued, and similar to the original investment, it is eligible under Section 80C. While this investment option operated by the post office yields relatively good returns and offers high safety, it suffers on the liquidity parameter, as the interest does not get paid out at regular intervals and there is no facility for premature encashment.
Kisan Vikas Patra (KVP)
Doubling money over eight years and seven months, the post office-run scheme yields around 8.4 per cent pre-tax, compounded annually. The deposit amount can be as low as Rs 100 with no maximum limit. Interest is taxable, though TDS does not apply. Premature encashment facility is available after two years and six months, though at a discount. The KVP scheme scores fine compared with most other post office schemes on the safety and returns parameter. However, it has limitations on the liquidity and taxation front.
Public Provident Fund (PPF)
The fund is popular with retirees mainly due to its taxation benefit, safety factor and deposit flexibility features. The scheme runs for 15 years, offers tax-free 8 per cent interest compounded annually, and the deposit amount (minimum and mandatory Rs 500 and maximum Rs 70,000 annually) is eligible for Section 80C benefit. However, the fund scores low on liquidity with interest accruing, and first withdrawal permitted only after seven years.
Bank Fixed Deposits
Bank deposits, a long-time favourite among senior citizens enjoys relative safety (deposits up to Rs 1 lakh are insured), additional returns (0.25 per cent to 0.50 per cent extra for senior citizens) and good liquidity options (premature withdrawal possible and regular interest pay-out option). However, interest is taxable, TDS is applicable and only deposits for five years and more qualify under Section 80C deduction. Currently, these deposits could yield senior citizens around 8 per cent annually for tenures up to three years.
For retirees and potential retirees who have the willingness and the ability to take some risk, the following options could be a good fit.
Corporate Fixed Deposits
Corporate deposits for tenures up to three years could offer up to 12.5 per cent annually for senior citizens. They usually have regular interest payment options and allow premature withdrawal at a cost. However, interest is taxable and TDS is applicable. Senior citizens would do well to stick to deposits of corporates that have high credit ratings (for instance, AAA).
Fixed Maturity Plans
The plans are close-end schemes offered by mutual funds across various tenures based on the prevailing interest rate scenario. While the funds indicate the universe in which they are likely to invest and the indicative yields of such instruments, there is no guarantee by the fund to provide a fixed rate of return. FMPs typically match the returns of the underlying debt instruments.
While returns may be better than traditional deposit options, the investments may involve credit risk. They also attract capital gains tax.
Monthly Income Plans
Several mutual funds offer regular income payouts through monthly income plans. Such schemes deploy invested funds predominantly in debt instruments, and a small portion in equity which may deliver the “kicker” to returns, when market conditions are favourable. Monthly Income Plans are market-linked, entail risk and do not assure returns. However the dividends are tax free, though capital gains are taxable.
Optimal Choices
In all these options the interest rate might seem attractive, but many of them slip on a post-tax return basis. Investors should always keep tab of this before making an investment choice.
An analysis of post-tax returns (assuming a tax slab of 20 per cent and also factoring in Section 80C tax benefits) of the high-safety instruments (except bank deposits), throws up NSC as the most rewarding option with an annualised yield of 12.07 per cent. Senior Citizens Savings Scheme comes a close second with 11.20 per cent, followed by PPF (9.62 per cent). KVP and post office MIS yield 7.09 per cent and 6.07 per cent respectively.
NSC emerges as the optimal choice for senior citizens who do not have liquidity constraints and have other sources of regular income. However, the high liquidity offered by Senior Citizens Savings Scheme makes it optimal for the elderly who would like to receive regular income flows.