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Saturday, June 22, 2013

Investment Portfolio for Retired Clients – FDs Vs. SCSS

Building up a retirement corpus portfolio for retired clients is a tough job. There are several challenges a planner will come across while dealing with such clients and we have to be very sensitive while structuring an investment portfolio of retirement corpus. Even a small mistake in asset allocation or choosing a wrong product can jeopardise financial lives of our clients.
Recently I wrote an article in Business Standard on choosing between Fixed Deposits Vs. Senior Citizens Savings Scheme in the current scenario. I thought it will make an interesting reading to you while dealing with your retired clients.
The article was the result of a brainstorming telecon between Santosh Salunke, a CFP Practitioner in Mumbai & me. I would like thank all those who call me to seek inputs (it makes me research & think) and those whom I regularly disturb with calls to take inputs for writing assignments & client cases :-)
I request you to put across your thoughts on this subject and also share what investment products and asset allocation you recommend to retired clients.

Start of Article

People approaching retirement usually get a fabulous send off party and a respectful acknowledgement of their services to the company after completing 30-35 years of active working life. On one side retirement may be about shedding off responsibilities and living a relaxed life. But on the other hand it also dawns a great responsibility of managing retirement benefits received to lead the remaining part of your life which can sometimes be as long as the working life itself!
Retirees receive a considerable amount from provident fund accumulation, superannuation benefits and gratuity benefits. And many of the prudent investors will have accumulated corpus through disciplined investing in mutual funds, stocks and fixed deposits
Retirement brings in a different set of investment options and investment objectives mixed with various apprehensions. You will be required to take many investment decisions to channelize the retirement corpus all by yourself or with the guidance of a financial planner.
The first and the foremost decision will be to determine the asset allocation mainly between equity and debt. A 70:30 debt:equity ratio suits for many of the retirees but a proper analysis of your current investments and passive income streams needs to evaluated before finalizing.
Debt gives a lot of stability to the portfolio and also can be used to generate regular income streams to meet monthly expenses. Whereas equity boosts your long term returns and help you beat the inflation. A well-thought asset allocation is half the job done fund your retirement life.
Fixed Deposits (FDs), Corporate Deposits, Senior Citizens Savings Scheme (SCSS) , Post Office Monthly Income Scheme, Debt Mutual Funds, Pension Plans by Life Insurance Companies are the various options available today investing your retirement corpus in debt.
You have to compare the different features of the investment avenues like risk, returns, liquidity, term, mode etc before taking a decision on which is the best suitable avenue for you. Out of all these FDs & SCSS are best placed to be in your debt portfolio in the current scenario.
SCSS has been a huge hit since the time it was launched in 2004 by the Government of India to address the regular income requirement of senior citizens. Its popularity has been purely due its attractive interest rate of 9% and also it’s backing by the sovereign.
FDs have been unattractive for many years with post tax interest rates not even beating the economic inflation. But times have changed and for good. Of late FD interest rates have gone up considerably and should be seriously considered as an alternative to SCSS which had practically no competition in its category till recently.
Most of the banks – be it national or private are offering FD rates for Senior Citizens above 9% and some of them are even giving upto 10%. Some of the cooperative banks do offer rate higher than 10%, but are comparatively not safe to park a large sum of retirement corpus.
Feature Fixed Deposits (Sr. Citizens) Senior Citizens Savings Scheme
Qualifying Age 60 60 (55 for VRS or retired)
Term Differs 5 Years (extendable by 3 years)
Returns Current average 9.5% 9%
Prematurity withdrawal Generally around 1% penalty with most of the banks penalty of 1.5% between 1-2 years and 1% above 2 years
Taxation Interest gets added to income for taxation purpose. Interest gets added to income. Investment qualifies for 80C benefit

Retirees should analyze both these options under their specific circumstances. Let us look at the factors which you need to consider before taking a decision on whether to go with FDs or SCSS;

Interest Rate

Comparing the interest rates is probably the first step but not really a deciding factor. FDs are offering 0.5-1% higher rates than SCSS, which essentially converts into a higher monthly income for you. Rs. 15 lakhs parked in SCSS will fetch you a monthly income (payout is actually quarterly) of Rs. 11250 whereas a FD with 9.5% rate with give you Rs. 11875. Rs. 625 of higher income because of choosing the FDs over SCSS and this doubles if you can get rates upto 10%.

Term & Withdrawal

This can be a big deciding factor. SCSS carries a term of 5 years and can extendable by another 3 years with interest rates prevailing at that time. Any prematurity withdrawal will attract a penalty of 1.5% between 1-2 years and 1% above 2 years. Whereas the FDs offer the flexibility of deciding the term as per your convenience, what if you want to use the money for daughter or grandchild’s marriage after 3.5 years or 6 years? Banks also give loans on FDs for emergency purposes.

Income Vs. Accumulation

SCSS offers regular payout of interest rates on a quarterly basis whereas FDs offer interest payouts as well as the depositor can choose for cumulative option. If you have a decent income stream from house rentals, pension or some other income streams, you may really not be requiring a regular income from investments in the initial years soon after retirement.
In this case it makes sense to grow your investment corpus by investing in FDs and opting for cumulative option. The compounding works great even with debt investments.

Taxation

The returns from both the instruments are taxable and get added to your income while calculating the tax. However investments in SCSS are eligible for 80C tax benefits where regular senior citizen FDs don’t qualify. So if you are falling in the taxable bracket and wish to avail of this tax benefit, you should consider investing through SCSS. But check out if you are already investing in other similar investments which qualify for 80 C tax benefits like Life Insurance, PPF and even Tax Saver FDs

Conclusion

Considering all the above factors, in the current scenario it does make sense to invest your retirement corpus in Fixed Deposits to build your debt portfolio. And we don’t know for how long will these high rates prevail, so make use of this opportunity to invest in Fixed Deposits after evaluating all the factors mentioned above.

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