Options to invest your retirement money in 2016

The guiding principle at retirement stage should be that the investment makes monthly or quarterly payments that take care of everyday financial needs.

By Jinsy Mathew  
Thursday, January 28, 2016

So, you are set to hang your boots and enjoy life after retirement. But have you planned your financial well-being for the next 20-25 years apart from thinking vaguely about where you will invest your retirement corpus? One of the major challenges after retirement is ensuring a sustainable fl ow of inflation-beating income to maintain one's standard of living.

Also, at this stage, the capacity to take risk with one's investments is low. That's why retirement planning has become synonymous with investing in avenues with guaranteed and secure returns. Financial planner Hemant Rustagi of Wiseinvest Advisors says retirees often make the mistake of looking at absolute safety of capital.

However, they must realise that in the bargain most end up opting for instruments that not only generate low returns but are also least tax-efficient "What needs to be done is to strike a balance between traditional and market-related investments," he says. Given below are the options where one can invest one's retirement corpus.

The guiding principle at this stage should be that the investment makes monthly or quarterly payments that take care of everyday financial needs.

TRADITIONAL OPTIONS SENIOR CITIZENS SAVINGS SCHEME (SCSS)

Run by the central government, this is one of the most popular savings avenues among elderly Indians. The entry barrier is 60 years. However, those who have opted for voluntary retirement at 55 are also eligible. The interest rate is 9.3 per cent per annum, higher than what is offered by most other debt instruments with a quarterly pay-out option.

The interest is credited to the account on March 31, June 30, September 30 and December 31. One can invest up to Rs 15 lakh through post offi ces or designated public sector banks.

The five-year lock-in period can be extended for another three years. The investment qualifies for deduction under Section 80C of the Income Tax Act. However, if the income earned is over Rs 10,000, tax is deducted at source. Another factor that makes SCSS a go-to product is liquidity.

In case of an emergency, there is a provision for premature withdrawal by paying a fi ne of 1-1.5 per cent on the invested amount.

POST OFFICE MONTHLY INCOME SCHEME (POMIS)

This is another simple way of ensuring regular income. The return is credited to a designated account on a monthly basis. The interest rate is a tad lower than the SCSS' 8.4 per cent. The investment cap is Rs 4.5 lakh for a single account and Rs 9 lakh for a joint account.

The maturity period is six years. If the person remains invested for the entire duration, he is eligible for a bonus of 5 per cent. On the other hand, a penalty is levied on premature withdrawal. One can collect the payment from the post office or transfer the amount to the bank account electronically.

The account can be easily transferred to another post office. The returns are added to the income and taxed as per one's income tax slab. That's why it is the one of the best options for those in the lower tax bracket.

POST OFFICE TIME DEPOSITS (POTDs)

These are similar to bank fixed deposits. The minimum investment is Rs 200 and, thereafter, in multiples of Rs 200. There is no cap on how much one can invest.

The interest payout is annual. The interest is compounded on a quarterly basis, which makes it an attractive proposition. The investment can be for tenures ranging from one year to five year. Here, too, the interest income is subject to tax, though tax is not deducted at source.

The five-year deposit is eligible for tax deduction under Section 80C of the Income Tax Act. Since the investment is backed by the government of India, it is risk-free and offers guaranteed returns.

FIXED DEPOSITS (FD)

FDs are time deposits offered by banks. There is no minimum investment requirement. Traditionally, they have been the most sought after by those looking for safe returns. The tenure can be a mere week to 10 years. The applicant can opt for crediting of interest to a savings bank account on quarterly, semiannual or annual basis. There is also an option for re-investment of interest.

Senior citizens get 0.25-0.5 per cent over and above the regular rate. Barring for tenures of five years and above, bank FDs do not enjoy any tax exemption. The long term FD (five year-plus), which is eligible for deduction under Section 80C, cannot be liquidated in the middle of the term and, hence, is illiquid.

Also, the interest attracts TDS and cess if it is more than Rs 10,000 in a financial year. One must note that the risk is low only as long as the bank is in a good financial shape. In case the bank goes bust, only Rs 1,00,000 is guaranteed (by the Deposit Insurance and Credit Guarantee Corporation).

REVERSE MORTGAGE

This is an apt product for those who have a lot of real estate but not much free cash. In this, the retired person keeps a house as collateral with the bank. In return, the bank makes monthly payments according to the value of the house. The borrower can opt for monthly, quarterly, annual or lump sum payments.As reverse mortgage is a loan, the interest rate is either fixed or floating.

Also, the payments are not taxable. This is because the amount received from the bank is considered a loan and not income. As per the RBI guidelines, the maximum period for which the property can be mortgaged is 20 years, after which either the borrower or the heir (in case of the death of the borrower) can either repay the loan or sell the house and settle the transaction. The excess amount generated in the process is passed on to the borrower or the heir.

MARKET-LINKED PRODUCTS

Surya Bhatia, Certified Financial Planner and Principal Consultant at Asset Managers, says 30-40 per cent corpus must be placed in market-related products, preferably in equity mutual funds, through the systematic transfer plan (STP) route. This is because equity will provide growth to the portfolio, which will come in handy after the first eight to ten years of retirement when inflation starts to bite. Suggesting the break-up of the investment in equity funds, Bhatia says it is prudent to have more money in large-cap and multi-cap funds.

He says mid- and smallcap funds should be restricted to 30 per cent of the overall equity exposure. Given below are some of the options that one can consider apart from pure equity/debt mutual funds.

MONTHLY INCOME PLANS

Like post offices, mutual funds also offer income plans.These are open-ended schemes that invest most of their money in debt instruments. Only a small portion is put in equities. These are best for those who are conservative but still want some exposure to equity markets. The regular income comes from dividend payouts, which are tax-free for investors.

However, unlike post office plans, where returns are guaranteed, there is no such surety about dividends from mutual funds. These are paid either on monthly, quarterly or on annual basis. Also, the amount is not fixed. The dividend is not taxed but redemptions are taxable as per capital gains rules. Redemption before three years attracts short-term capital gains tax. Profits from MIPs sold after three years are considered long-term capital gains and taxed accordingly, that is, subjected to a fl at tax rate of 20 per cent with indexation.

FIXED MATURITY PLANS (FMPS)

FMPs are close-ended debt mutual funds with tenures ranging from three months to three years. These are close-ended and cannot be redeemed like other mutual funds before maturity. They are listed on exchanges where they can be bought or sold, though they are a highly illiquid investment.

Even though liquidity is an issue, the one factor on which FMPs triumph over FDs is returns. It has been observed that debt mutual funds give returns that are 50-100 basis points more than what is paid by FDs.

Also, FMPs are more tax efficient for tenures over three years as they enjoy indexation benefits with a fl at 20 per cent tax rate. Given their structure, FMPs are more suitable for individuals in the 30 per cent tax bracket. If the investment is for one to three years, the investor has to add the gains to his/her income and pay tax according to her/his income tax bracket.

EQUITY MUTUAL FUNDS

Shunning equity can be a blunder. However, financial planners say that due to bitter previous experience, many stay away from this risky investment. Also, the problem is compounded as there are a plethora of fund types to choose from. For such a person, Rustagi says that STP is the way to go. Through STP, one can invest a lump sum in a particular fund (say debt) and, thereafter, transfer a fixed sum regularly to another mutual fund (say equity). This ensures that your corpus starts with the safety of a debt fund even as you slowly keep increasing exposure to equity funds. Happy investing!

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