Mar 06, 2013, 03.08 PM | Source: CNBC-TV18
Personal finance expert Hemant Rustagi of Wiseinvest Advisors discussed about ways of earning regular income post retirement.
Hemant Rustagi (more)
CEO, Wiseinvest Advisors | Capital Expertise: Mutual Funds
Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.
Q: Retirement is a long drawn process for investors and generating a regular income on a consistent basis after retirement is equally challenging. What are the options for retiree to generate regular income?
A: It is quite challenging to generate regular income on consistent basis and fortunately there are number of options that are available for the retirees to generate regular income. Before discussing about these options I would like to briefly touch upon the strategy to decide the right product mix.
First, every retired person must assess the need for regular income carefully. Second, the retirees who get pension should consider the amount and adjust the requirement accordingly. Third, it is very important to consider increase in the expenses on account of inflation over a period of time.
All these factors, this entire process helps a retiree to ascertain as to what kind of return he or she needs to generate on the portfolio for example a retiree who has a corpus of Rs 50 lakh and assuming that his monthly requirement is around Rs 30,000, which is Rs 3.6 lakh per annum. He needs to just generate return of around 7 percent, which looks easy.
However, the picture changes completely the moment inflation is in. If I assume inflation at the rate of 7 percent then after ten years his monthly requirement will increase from Rs 30,000 to Rs 60,000, which is Rs 7.2 lakh per annum, which means that he will have to generate a return of more than 14 percent, which is very difficult if not impossible.
So, if he investment the money, which most of the retirees do in fixed interest rate bearing securities from the beginning, he is going to struggle after few years to keep pace with inflation. Therefore, the portfolio has to be a mix of fixed interest bearing securities as well as the market linked investment options offered by the mutual funds.
Talking about some of the options that help retiree in generating regular income and to begin with, there are post office monthly income scheme; these are currently offering return of 8.5 percent, the interest is paid on monthly basis. The maximum money that can be invested in a single account is Rs 4.5 lakh but jointly it can be up to Rs 9 lakh.
The second option is senior citizen saving scheme; currently the interest, which is being offered is 9.3 percent, which is paid on a quarterly basis and the maximum money that can be invested in single account is Rs 15 lakh but if husband and wife both are above 60 year of age, can have two separate account and invest Rs 15 lakh each, which is Rs 30 lakh in all.
The third option is bank fixed deposit; in this there is an option to get interest on monthly basis. The interest, which is offered is fixed but varies depending on what the interest rate scenario is at that point in time.
The fourth option is monthly income plan or mutual funds; these are market linked products, these are debt hybrid products wherein 75-80 percent of the money is invested in debt and the rest in equity. These have the option to give better return than other traditional options but the returns can be erratic too. Therefore, one has to be careful in terms of how much exposure one has to this.
The Union Budget 2013 has proposed dividend distribution tax in these funds, has been increased from 12.5 percent to 25 percent, which to my mind makes the dividend option unattractive to most people. However, as I mentioned earlier the market linked product has to be there in the portfolio. This product can be used or equity oriented balance fund also can be utilised in this portfolio to get capital appreciation over a period of time.
Apart from that there is an option for non-convertible debentures; these offer interest on monthly-quarterly-half yearly and yearly basis and there are also tax-free interest bonds, which generally pay interest on yearly basis. So, there are quite a number of options that are available but the key factor is to keep an eye on the need for regular income and also the future requirement on account of inflation. So, if one has a mix of these two kinds of products. I think retirees can achieve their goals.