Having your cake and eating it too

FINANCIAL PLANNING: Investing in multiple tools such as mutual funds and pension funds will help mitigate risks.

Rising interest rates have given some relief to retired people. Over the last few years, rates have been declining causing difficulties for senior citizens to survive on interest income.

The scenario seems to be changing since interest rates on bank fixed deposits (FD) are at a three-year high. A 9 per cent FD a year works out to 9.31 per cent after quarterly payments, in cumulative deposits.

This is one of the highest rates available at present, compared with other fixed interest products. It is time to re-look your existing fixed income portfolio. First, let us look at different fixed interest products available, the key concerns after retirement being safety of your principal and regular, fixed returns.

Senior citizen savings schemes "" An individual who is 60 years or more is eligible for this scheme. There are a few exceptions for other retired people over the age of 55.

In this scheme, one deposit multiple of Rs 1,000 not exceeding Rs 15 lakh can be made. No withdrawal is permitted for five years (the tenure). The depositor may extend the account for a further three-year period. Deposits made under these rules shall bear an interest of 9 per cent a year from the date of deposits, payable at the end of each calendar quarter.

Fixed deposits "" The 'fixed' in fixed deposits denotes the period of maturity or tenure. The tenure also decides the rate of interest you earn. You can have a fixed deposit in a bank, a corporate entity (financial institutions, manufacturing companies or non-banking financial companies).

As FDs are unsecured in nature, safety should be your primary concern. Returns must be secondary (though not unimportant). Stick to organisations that have a good credit rating from Crisil, Icra or Care.

Post office monthly income scheme "" Post office monthly income schemes provide a monthly income of 8 per cent a year. The scheme offers better liquidity, with investors having an exit option after one year.

Investors have to wait for a three-year period to withdraw from the scheme without attracting the penalty. The minimum investment for a single/joint account is Rs 6,000, while the maximum limit is Rs 3 lakh for a single account and Rs 6 lakh for a joint account.

In short, it is suitable for people who wish to invest a lump-sum amount initially and earn interest on a monthly basis. And this makes it an ideal investment vehicle for retired people.

Post office time deposits "" Post office time deposits are available for periods ranging from one year to five years. The current rate for a one-year deposit is 6.25 per cent. Interest payments are made annually. Investors have an exit option within six months without receiving any interest.

There is a one-year lock-in for exit with interest receipt. So if you are a short- to medium-term investor looking for an annual interest income along with flexible investment tenure, time deposits are suitable for you.

Life insurance pension plans "" Immediate pension plans provide regular income throughout your lifetime from the date you choose.

The amount you receive depends on the premiums you pay, the market value of your investment and the annuity option you have chosen. Pension plans provide you the option to park a part of the premium in linked funds and pay for the death benefit (if any) opted by you and the rest is invested in the plan of your choice.

Annuity benefit "" On the date of investing (retirement), you start receiving a regular income for life. This amount would depend upon the annuity option chosen by you and the value of units as on the investing date. The annuity also depends upon the annuity rates offered by the company as on that date and are not guaranteed. There are four options:

Life annuity - annuity for life

Life annuity with return of purchase price "" life annuity with the return of the purchase price to the beneficiary

Life annuity guaranteed for 5, 10, 15 years "" guaranteed annuity is paid for the chosen term (5/10/15) and after that it continues till the time the beneficiary is alive

Joint life, last survivor with return of purchase price "" the annuity is first paid to the beneficiary, and after death, the spouse starts getting the same pension. After the death of the last survivor the purchase price is returned to the beneficiary.

Public provident fund "" PPF is among the most popular small savings schemes. The scheme offers a return of 8 per cent and has a maturity period of 15 years.

It provides regular savings by ensuring that contributions (which can vary from Rs 500 to Rs 70,000 a year) are made every year. But for those who are looking for liquidity, PPF is not the best option.

Withdrawals are permitted only after the first five years. There is no protection against inflation. Hence, during years when inflation is high, your real rate of return on your investment in PPF could be low.

The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free. If you are relatively young and have time on your side, then PPF is for you. Also if your account is nearing maturity, contribute the maximum you can so that you can make use of the best rates in the fixed-income universe.

So now check your portfolio to find out which instrument is giving you lower returns than the current market rates and reshuffle the portfolio to the higher level of debt product. Risk-free returns on investments "" even fixed-income instruments "" are history. Or will soon be.

In a deregulated interest rates scenario, risk-free instruments will fetch the lowest returns, and you can ill-afford to count on them alone to reach long-term financial objectives such as retirement.

In other words, you cannot avoid risk any more; you'll need to manage it. To minimise this risk (of tapping avenues that don't carry the infallible government guarantee), you will need to invest through collective investment vehicles such as mutual funds and pension funds.

(Click here for the table)

(The writer is head-financial planning at Sykes & Ray Equities)