Senior citizen should carefully plan fixed income portfolio

Anil ChopraBajaj Capital

Fixed income instruments are popular mostly among retirees and senior citizens. Senior citizens or those who have retired, need regular income to meet their household expenses. During the retirement phase, the regular inflow of income either stops or falls. Pension could be the only source of income for them. Fixed income products provide interest income which is not only fixed during the entire term but also assured to a large extent. The need for fixed income investment therefore is high with them. Further, fixed income products have various interest payment options such as monthly, quarterly, annual thus catering to one's individual requirement. Senior citizens therefore rely heavily on fixed income (FI) products. Some common FI products include bank fixed deposits, company fixed deposits, post office monthly income scheme, senior citizen savings scheme etc. As a senior citizen, it is important that FI products occupy a large part of their investment portfolio. They give stability and provide steady flow of income to investor assuring adequate to high safety to their principal.

Key things to consider while building such portfolio

Safety would be the key. Go for instruments that carry high ratings unless they are deposits in nationalized banks. Diversification is important and therefore spread your amount in several places or companies. As far as returns are concerned, FI products other than bank deposits carry a high return. Bank interest rates are largely in line with the policy rates in the economy. Do not go overboard in chasing returns and stick to reputed and well-rated companies offering 1-3 percent higher returns as against bank deposits.

How to create such portfolio

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Estimate your monthly household requirement. Also, adjust for inflation during the estimating process.

Remember, life expectancy is increasing and therefore one will have to provide for a longer non-earning period of one's life. Get a fix on minimum base amount that you would require each month to run the household. To earn that amount, put a lump sum in a place where you feel has the maximum safety and assurance of regular interest income. You may consider more than one such instrument. Over and above that, spread your corpus among other FI instruments including company deposits or post office schemes.

How to tackle inflation and taxation

Most FI products fail on two counts unless they are tax-free instruments. As FI are debt assets, they fail to negate the impact of inflation. For a senior citizen, FI helps in meeting regular income needs but they also need to ensure that purchasing power of their money doesn’t remain stagnant or fall over period of time. To tackle inflation, invest a portion of your savings in equity-oriented mutual funds schemes.

One may consider balanced mutual funds, monthly income plans of mutual funds as equity allocation in them is lower compared to a diversified equity funds. Those with high risk appetite may also consider large-cap diversified equity funds.

The interest income from most FI products is fully taxable as they get added to one's total income. Based on one's income slab, the interest income stands reduced by 10/20/30 percent. As a senior citizen, one should try to invest in FI instruments in such a way that the total income (from interest, pension) remains under the exemption limit. Doing this, investing in FI products even where interest income is taxable doesn’t hurt much.

Remember, income till Rs 3 lakh in a year is exempted for a senior citizen under age 80 while it is Rs 5 lakh for those above age 80. One also gets tax benefit under section 80C up to Rs1.5 lakh a year.

ConclusionDiversifying across FI products might not be sufficient. One should keep adequate cash or be invested in liquid instruments to take advantage of interest rate changes. Do not invest entirely in deposits of a specific tenure. Spread across varying maturities so that one is able to meet liquidity needs too. Keep safety as the prime objective with your hard earned funds and stay away from direct shares unless you are a share market pro.