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Retired? Some GREAT investment plans
March 23, 2006
While dealing with the subject of retirement planning, our implicit assumption was that individuals have time on their side and can use the various strategies for planning and conducting their retirement in a better manner.
However there is a segment for which this advice might have come a bit too late: the retirees. 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.
In this article, we will discuss the various investment options available to retirees and find out how they measure up.
Investment avenues for retirees
* Compounded quarterly
Senior Citizens Savings Scheme (SCSS)
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-year period and offers a return of 9.00% pa 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 is deducted. A termination after completion of 2 years, attracts a penalty of 1.00% of the amount invested.
Post Office Monthly Income Scheme (POMIS)
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 1,000; the upper limits have been set as Rs 300,000 and Rs 600,000 for single and joint accounts, respectively.
The investment tenure for POMIS is 6 years and investments earn a return of 8.00% pa; also a 10.00% bonus is paid on maturity. The norms for premature withdrawal are rather stringent. Withdrawals are permitted after 1 year; however 5.00% of the initial amount invested is deducted. Withdrawal after 3 years is permitted without any deduction.
Post Office Time Deposits (POTD)
POTD is essentially the fixed deposit variant from the small savings segment. While the minimum investment amount is Rs 200, there is no upper limit on investments.
POTD offers investors a number of options in terms of investment tenures ranging from 1 year to 5 years. Similarly, the returns range from 6.25% to 7.50% on a quarterly compounding basis. Interest payments are made annually.
Premature withdrawals can be made after the completion of 6 months; however investors have to bear a loss on interest.
8% Savings (Taxable) Bonds, 2003
These bonds offer an assured return of 8.00% pa over a 6-year period. Investors can choose between the cumulative and the half-yearly option. The 8% Savings Bonds fare rather poorly on the liquidity front with no premature encashment permitted. Like its peers above, investments in these bonds are fully taxable.
Retirees can also consider making investments in the monthly income plan of fixed deposits. Such deposit schemes are offered by companies like HDFC Limited. Our preference is for fixed deposits with an 'AAA' rating indicating a high degree of safety.
Interest payouts are made every month 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.
Albeit terms and conditions set by the issuer govern 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.
All the investment options discussed so far were of the assured return variety. Alongside the fact that some of the returns might seem rather modest when adjusted for inflation, the tax implications will also adversely affect their attractiveness. After the omission of Section 80L, interest income from bonds and fixed deposits among other avenues has become fully taxable.
Monthly Income Plans (MIPs)
Monthly Income Plans typically invest 15%-20% of their corpus in equities and the balance in debt instruments. Investors can choose between the monthly, quarterly, half-yearly and annual dividend options or the growth 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, albeit a dividend distribution tax has to be borne by the fund house.
The decision to invest in any of the aforementioned schemes and the allocation to each scheme should be a factor of the investor's risk profile. Retirees who are not averse to taking on a higher degree of risk can make more allocation to MIPs or even consider adding diversified equity funds to their portfolios.
Conversely, those who attach greater importance to capital preservation should invest predominantly in assured return instruments.
Likewise, the retiree's requirements will also play an important part in the portfolio creation. For example, a retiree who is well off and supported by his family may not need to fend for himself. Instead he might be keen on investing for his grandchildren and other family members. In such a scenario, the investment tenure goes up, as does the opportunity to take on higher risk; equity-oriented funds emerge as a feasible option.
Finally, don't undermine the importance of a qualified and experienced investment advisor. Powered by expert advice and prompt service, a good investment advisor can ensure that your post-retirement investments become a hassle-free affair.
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