In India, fixed-income products and property (plus some gold) are the most preferred avenues of investments, for most retired persons and senior citizens.
This is but natural because Safety of Investment and Stability of Returns are an extremely important pre-requiste for these investors.
Equity is the major asset class which is absent, or nearly absent, from most portfolios.
Again, the reasons are quite obvious...
... returns from equity are highly volatile, whereas senior citizens / retired people need stable income
... risk of losing capital in equities is high, whereas such investors cannot afford to lose money.
Given this scenario, developments in recent times are posing a serious challenge to this category of "low risk-appetite" investors.
1. High Property Prices
Sky-high property prices create two problems. One, the outlay required to buy a property is quite high. And, most of this money has to come from own pockets, as loan financing option is ruled out. Two, the rental yields work out to mere 2-4%; down from 7-9% in the earlier times.
Hence, property as an investment option, is possibly no longer a viable option.
2. Low Interest Rates
Interest rates in India have dropped significantly. From double-digit returns till a few years back, the interest earnings from fixed-income instruments are down to mere 6-8% p.a. Given the fixed capital amount, downward revision in the interest rates has directly impacted the monthly inflows for the retired people and senior citizens.
Hence, fixed income too is possibly no longer a dependable investment option.
3. Shift to market-linked rates
Equity is not the only investment now, where the returns are market-linked. Even the fixed-income investments are now market-linked. For example, the good old Post Office Schemes now face quarterly resetting of the interest rates. Popular schemes like PPF no longer give assured returns for the entire investment period of 15 years.
Hence, investors have to now cope with this new phenomenon of volatility in interest rates.
However, as they say "every cloud has a silver lining". Besides the above negatives, there is one significant positive development too.
Mutual fund has matured into a stable, consistent, dependable, proven, tax-efficient and transparent investment option. Plus, it offers multiple varieties of schemes, each suiting to a particular need. Even the senior citizens and retired people will find many useful schemes among these, which are appropriate for their specific requirements of Safety and Stability.
In view of the foregoing, retired people and senior citizens have to do some serious rethinking of their past beliefs and practices.
Old formulas will not work in the New world.
Either they change or they become extinct.
This is an important step to investing in recent times. If not, financial struggle is almost certain.
So here are the 11 key suggestions for the investors in the 'retired people and senior citizens' category.
One. Reduce your dependence on property. Except for two properties — one for own use and one rental — sell all additional properties that you own (assuming there is no significant capital appreciation expected).
Two. Interest rates may remain in single digits for the foreseeable future. It may take some time for the interest cycle to reverse. So get used to this new market reality. Don't cry for the good old days gone by. Only when you accept this fact, can you start exploring the new alternatives.
Three. Beware! These are dangerous times. Taking advantage of this low-interest scenario, many fraudulent investments promising high returns, will appear in the market. Don't be tempted by such alluring offers. They are nothing but scams.
Four. Co-operative Bank fixed deposits generally offer around 2-4% higher interest rates than other bank fixed deposits. Beware! These can be too risky. Risk of default in co-operative bank deposits is quite high. Therefore, don't invest in Co-op. Bank FDs.
Five. Company fixed deposits too generally offer around 2-4% higher interest rates than bank fixed deposits. Beware! These are also risky. Risk of default in company deposits is quite high. Also, they are highly illquid. Therefore, don't DIRECTLY invest in the Company FDs.
Six. Much better option to earning higher returns from Company FDs, is to take the mutual fund route. Debt mutual funds invest in a basket of Company FDs, Govt. Securities, Bonds, Debentures etc. This diversified portfolio improves the returns without sacrificing the safety. Besides, liquidity is excellent. You can withdraw your money anytime you want.
Seven. Add a little bit of equity to your portfolio. Again, mutual funds are an excellent way to do so. MIP schemes from mutual funds invest 75-90% corpus in debt-based products and only the balance 10-25% is invested in equity. This keeps the investment relatively stable and yet improve the returns. You don't really need to expose yourself to pure equity funds.
Eight. Take full advantage of the mutual funds' tax efficiency and lower your tax liability. Interest income from fixed deposits, post office schemes etc. is fully taxable. But long term capital gains (holding period > 3 years) from debt and MIP type of mutual fund schemes are taxed @20% with indexation benefit. Hence, depending on the rate of inflation, the effective tax rate will work out much lower (sometimes even zero).
Nine. Another big relief in investing through mutual funds, is the absence of TDS or Tax Deduction at Source. As you would be fully aware, this is a big headache when investing in fixed deposits.
Ten. Some schemes like 8% GOI Savings (Taxable) Bonds, Senior Citizens' Saving Scheme and Pradhan Mantri Vaya Vandana Yojana offer decent interest rates, even in today's low-interest environment. You can consider investing a part of the corpus in these products.
Eleven. Insurance policies and ULIPs are a strict NO. You don't need insurance after retirement. Plus, the mortality charges will be exorbitant. Net result... absolutely terrible returns and also terrible liquidity.
Ponder over the above suggestions and take appropriate corrective action... TODAY!
This is but natural because Safety of Investment and Stability of Returns are an extremely important pre-requiste for these investors.
Equity is the major asset class which is absent, or nearly absent, from most portfolios.
Again, the reasons are quite obvious...
... returns from equity are highly volatile, whereas senior citizens / retired people need stable income
... risk of losing capital in equities is high, whereas such investors cannot afford to lose money.
Given this scenario, developments in recent times are posing a serious challenge to this category of "low risk-appetite" investors.
1. High Property Prices
Sky-high property prices create two problems. One, the outlay required to buy a property is quite high. And, most of this money has to come from own pockets, as loan financing option is ruled out. Two, the rental yields work out to mere 2-4%; down from 7-9% in the earlier times.
Hence, property as an investment option, is possibly no longer a viable option.
2. Low Interest Rates
Interest rates in India have dropped significantly. From double-digit returns till a few years back, the interest earnings from fixed-income instruments are down to mere 6-8% p.a. Given the fixed capital amount, downward revision in the interest rates has directly impacted the monthly inflows for the retired people and senior citizens.
Hence, fixed income too is possibly no longer a dependable investment option.
3. Shift to market-linked rates
Equity is not the only investment now, where the returns are market-linked. Even the fixed-income investments are now market-linked. For example, the good old Post Office Schemes now face quarterly resetting of the interest rates. Popular schemes like PPF no longer give assured returns for the entire investment period of 15 years.
Hence, investors have to now cope with this new phenomenon of volatility in interest rates.
However, as they say "every cloud has a silver lining". Besides the above negatives, there is one significant positive development too.
Mutual fund has matured into a stable, consistent, dependable, proven, tax-efficient and transparent investment option. Plus, it offers multiple varieties of schemes, each suiting to a particular need. Even the senior citizens and retired people will find many useful schemes among these, which are appropriate for their specific requirements of Safety and Stability.
In view of the foregoing, retired people and senior citizens have to do some serious rethinking of their past beliefs and practices.
 |
| Rethink. Restructure. Past investment practices will fail in this new future. |
Old formulas will not work in the New world.
Either they change or they become extinct.
This is an important step to investing in recent times. If not, financial struggle is almost certain.
So here are the 11 key suggestions for the investors in the 'retired people and senior citizens' category.
One. Reduce your dependence on property. Except for two properties — one for own use and one rental — sell all additional properties that you own (assuming there is no significant capital appreciation expected).
Two. Interest rates may remain in single digits for the foreseeable future. It may take some time for the interest cycle to reverse. So get used to this new market reality. Don't cry for the good old days gone by. Only when you accept this fact, can you start exploring the new alternatives.
Three. Beware! These are dangerous times. Taking advantage of this low-interest scenario, many fraudulent investments promising high returns, will appear in the market. Don't be tempted by such alluring offers. They are nothing but scams.
Four. Co-operative Bank fixed deposits generally offer around 2-4% higher interest rates than other bank fixed deposits. Beware! These can be too risky. Risk of default in co-operative bank deposits is quite high. Therefore, don't invest in Co-op. Bank FDs.
Five. Company fixed deposits too generally offer around 2-4% higher interest rates than bank fixed deposits. Beware! These are also risky. Risk of default in company deposits is quite high. Also, they are highly illquid. Therefore, don't DIRECTLY invest in the Company FDs.
Six. Much better option to earning higher returns from Company FDs, is to take the mutual fund route. Debt mutual funds invest in a basket of Company FDs, Govt. Securities, Bonds, Debentures etc. This diversified portfolio improves the returns without sacrificing the safety. Besides, liquidity is excellent. You can withdraw your money anytime you want.
Seven. Add a little bit of equity to your portfolio. Again, mutual funds are an excellent way to do so. MIP schemes from mutual funds invest 75-90% corpus in debt-based products and only the balance 10-25% is invested in equity. This keeps the investment relatively stable and yet improve the returns. You don't really need to expose yourself to pure equity funds.
Eight. Take full advantage of the mutual funds' tax efficiency and lower your tax liability. Interest income from fixed deposits, post office schemes etc. is fully taxable. But long term capital gains (holding period > 3 years) from debt and MIP type of mutual fund schemes are taxed @20% with indexation benefit. Hence, depending on the rate of inflation, the effective tax rate will work out much lower (sometimes even zero).
Nine. Another big relief in investing through mutual funds, is the absence of TDS or Tax Deduction at Source. As you would be fully aware, this is a big headache when investing in fixed deposits.
Ten. Some schemes like 8% GOI Savings (Taxable) Bonds, Senior Citizens' Saving Scheme and Pradhan Mantri Vaya Vandana Yojana offer decent interest rates, even in today's low-interest environment. You can consider investing a part of the corpus in these products.
Eleven. Insurance policies and ULIPs are a strict NO. You don't need insurance after retirement. Plus, the mortality charges will be exorbitant. Net result... absolutely terrible returns and also terrible liquidity.
Ponder over the above suggestions and take appropriate corrective action... TODAY!
