Having a combination of SCSS, PMVVY and bank FDs can form the core and provide a good combination of interest income and liquidity
The RBI has stopped issuing the 7.75 per cent bonds (taxable) recently.
There is no point speculating why the bonds were closed. The fact is that these bonds are unavailable now. And unless the government decides to relaunch a different version of these bonds, people will continue to look for alternatives – especially senior citizens looking for interest income.
Like all other aspects of personal finance, even the question ‘how senior citizens should invest’ also has shades of grey.
Different people are in different situations. So how a senior citizen should invest for interest income depends on several factors – age, savings corpus available, expenses/income required, availability of any part-time or rental income stream, health insurance coverage and medical contingency buffers, to name a few.
Alternative avenues for investment
So let’s first see the suitable alternatives to RBI’s 7.75 per cent bonds.
SCSS or Senior Citizen Savings Scheme: The SCSS gives 7.4 per cent annually, which isn’t much lower than RBI’s discontinued 7.75 per cent bond. The maturity period is five years, but can be extended for three years. The interest payment is quarterly. The maximum investment in the SCSS is capped at Rs 15 lakh per person (across all SCSS deposit accounts).
PMVVY or Pradhan Mantri Vaya Vandana Yojana: PMVVY is referred to as a pension product, but fundamentally is a long-term deposit giving regular interest income. The maturity period for PMVVY is 10 years currently and gives 7.4 per cent a year. At the time of purchase/deposit, the interest rate on PMVVY is locked for 10 years. Like SCSS, the upper limit in PMVVY is also Rs 15 lakh per person (for monthly pension, while it’s slightly lower for quarterly, half-yearly and annual payout modes).
If both spouses are above 60, then they can potentially park Rs 15 lakh each in SCSS and PMVVY, i.e., a total of Rs 60 lakh can be parked to generate 7.4 per cent annual interest income.
And since the payout can be structured monthly (in PMVVY) and quarterly (in SCSS), it can build a clean pension-like income stream:
After five years in SCSS and 10 years in PMVVY, the investor gets the full invested amount back. Of course, then comes the risk of reinvestment and finding a suitable instrument that gives at least inflation-linked returns to help senior citizens.
Inflation-beating returns not easy to come by
What other instruments are there?
Fixed Deposits for Senior Citizens: You already know about them. But the rates offered are currently quite low. Senior citizens do get an extra 50 basis points. Even this product can be structured to have a monthly interest payout.
Special Deposits for Senior Citizens: Recently, banks such as SBI, ICICI, and HDFC have started offering special deposits for seniors. These offer rates that are 30 basis points above the regular senior citizen fixed deposits rates as well.
Corporate Fixed Deposits: You need to be very careful with these. Corporate FDs carry a high risk of default, but there are a few good ones from AAA-rated corporates. They offer a few percentage points above regular bank deposits. If the corpus is large enough, then some exposure to high-quality and trustworthy institutions’ corporate FDs can be considered. But don’t be tempted by higher rates offered by shady corporates. If in doubt, avoid.
There is the Post Office Monthly Income Scheme (POMIS) which offers 6.6 per cent annual interest, paid out monthly.
Then, there are debt funds. I know these are perceived to be risky these days. But if you have the right expectations from debt funds, then these can be an option. How? For those senior citizens who have a sufficiently large savings base and aren’t ultra-conservative, some exposure to good-quality low-risk debt funds can be considered (and if need be, used as a source to generate SWP-based income stream). But debt funds are best-suited for senior citizens in the higher tax brackets, as these carry a major tax advantage if you hold for more than three years.
Annuities are also an option, though they require a longer discussion that is best left for another day.
What should you do?
No one product will be enough. It is difficult to offer general advice, as everyone’s situation and requirements are different.
But having a combination of SCSS, PMVVY and bank FDs can form the core and provide a good combination of interest income and liquidity. For some, having a portion parked in debt funds can also be considered.
And if a senior is following a well-thought-out retirement strategy, then a small portion of equity funds for growth (and not income) can also be a part of the overall portfolio.(The writer is the founder of StableInvestor.com)