I recently retired and got Rs 22 lakh from my company. I want to utilise this entire amount to sustain my post-retirement years. In addition, I will be getting Rs 5,200 per month as pension from my earlier investments. I thought of putting Rs 10 lakh in Post Office Senior Citizens Savings Schemes, which yields 9 per cent per annum, and Rs 5 lakh in a bank fixed deposit (FD) that will give me 8.75 per cent per annum. That would leave me with a balance of Rs 7 lakh, which I considered putting in a liquid or short-term debt mutual fund. What I need is Rs 10,000 a month from my investments. Will I manage that? Could you make some suggestions? It's obvious I cannot take too much of a risk.
-Ranjeet Kumar
Let's look at the various investment avenues individually.
Investments in the SCSS earn 9 per cent a year, payable quarterly. It has a maturity of five years, after which it can be renewed for a further three years. This investment is exempt under Section 80C of the Income Tax Act.
Life insurance companies provide an annuity through pension plans. You have a further choice of opting for a return of the principal at the end of the term, or on death, in which latter case, the amount will go to the nominee. Let's look at a pension plan called Jeevan Akshaya-VI, from the Life Insurance Corporation of India (LIC). At the age of 60, for Rs 1 lakh, it provides an annuity of Rs 9,530 per annum for life. On the death of the annuitant, nothing is payable. If the option of return of principal at death is chosen, then the annuity gets reduced to Rs 7,110 per annum, for life. It can be clearly seen that the annual return of 7.11 per cent is much less than what other options can provide. Annuity has another major disadvantage, in that no surrender or withdrawal is possible.
Bank fixed deposits generally bear an interest rate of 5 to 9 per cent a year, depending on the tenure and current interest rates prevailing. The advantage of a fixed deposit is that it is easily redeemable, though there is pre-mature penalty.
A wise move would be to opt for the flexi deposits that most banks offer. Here, you can break the deposit should the need arise. Incidentally, bank FDs of five-year tenures or more are exempt under Section 80C of the Income Tax Act. But you cannot break such a deposit.
Income schemes and other debt schemes of mutual funds invest in money market instruments and corporate debt instruments. They are able to protect the downside risk, but are riskier as compared to bank fixed deposits, post office saving schemes and SCSS. Neither the principal nor the returns are assured in mutual funds.
THE SOLUTION
For safety purposes, do go ahead with your decision to invest in a SCSS. To provide yourself with some liquidity, consider a bank fixed deposit and a small amount in a savings bank account.
Why not consider investing the remaining Rs 7 lakh in a balanced fund? A balanced fund invests a minimum of 65 per cent of its assets in equities (stock market), and the rest in fixed income securities (like a debt fund would). Due to its debt component, it will not give you the return a pure equity scheme would. But neither will it be as risky.
You have specifically told us you are risk-averse and we understand that. But we are also considering inflation, which will result in a need for your regular income to increase over time. Principal appreciation can be shifted to a more secure investment option.
Another benefit of investing in a balanced fund is that long-term capital gains are tax-free. You can choose two such funds where the investment should be spread equally over a year through a Systematic Investment Plan (SIP). Some good picks are HDFC Prudence, DSPBlackRock Balanced or Canara Robeco Balanced.
WHAT YOU HAVE TO CONSIDER
