Where Can Senior Citizens Invest to Earn Slightly Better Returns than Bank FDs

Jun 17, 2020

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Bank Fixed Deposit (FDs) is a preferred investment avenue for many Indians, especially senior citizens. Many a times, interest from bank deposits is the only source of revenue for retirees.

Until a few years ago, FDs used to offer anywhere between 7%-10% interest rate per annum. This was enough to beat inflation and meet future needs. However, over the years the rates have started to reduce. Very few banks now offer interest rates higher than 7% for longer tenure, i.e. 5 years or more.

The RBI has been cutting policy rate since 2019 to address growth concerns amid the standstill in the economy. While this is good news for borrowers, for depositors it means lower returns on their bank deposits.

Further, RBI has stated that their accommodative stance will continue as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target. With no end in sight to the pandemic crisis and the fact that the economy is unlikely to witness a V-shaped recovery, interest rates are unlikely to go up in the near future.

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Some smaller banks offer higher returns. However, if you are senior citizen, it would not be worthwhile to risk investing with these banks just for a few extra basis points. In fact, in the current scenario, risk associated with smaller banks has increased.

[Read: Factors To Look At While Investing In Bank FDs]

Recently, the RBI discontinued the 7.75% bonds as yield on 10-year government bonds fell below 6%. This was an excellent investment option as it provided higher returns along with safety and liquidity.

Those who are young can afford to invest in riskier instruments such as equities to make up for the low interest rate. But, this is not the case for senior citizens.

Consequentially, they are risk-averse and have limitations on the risk aspect with their money. Their priority is to maintain a regular flow of income, while beating inflation at the same time.

Table 1: Term Deposit (FD) rates applicable for deposits below Rs 2 crore

Banks FD Interest Rate (per annum) Senior Citizen FD Interest Rate (per annum)
Public Sector Banks
State Bank of India 2.90% - 5.40% 3.40% - 6.20%
Punjab National Bank 3.25% - 5.40% 4.00% - 6.15%
Bank of Baroda 2.90% - 5.30% 3.40% - 6.30%
Canara Bank 3.50% - 5.45% 3.50% - 5.95%
Bank of India 3.50% - 5.55% 3.50% - 6.30%
Private Banks
ICICI Bank 2.75% -5.50% 3.25% - 6.30%
HDFC Bank 2.75% - 5.50% 3.25% - 6.25%
Axis Bank 3.25% - 5.75% 3.25% - 6.25%
Kotak Mahindra Bank 3.00% - 4.50% 3.50% - 5.00%
IDFC First Bank 4.00% - 7.25% 4.50% - 7.75%
Interest rate range for tenure of 7-45 days to 5-10 years
All figures in % per annum
(Source: Respective Bank website)

So where can senior citizens invest to earn higher returns?

Listed below are some options worth considering...

Senior Citizen Saving Scheme (SCSS)

SCSS is a government-sponsored savings scheme for senior citizens. The primary objective of the scheme is to provide financial support to retirees by ensuring a regular flow of income. At present, the scheme offers an interest rate of 7.4%, paid quarterly. Being a government-run scheme, it offers safety and guarantee of your investment as well as reasonable rate of return. Investments in SCSS qualify for income tax exemption under Section 80C up to Rs 150,000 per financial year.

If you are an Indian citizen aged 60 and above, or if you are in the age group of 55-60 and have opted for Voluntary Retirement Scheme (VRS), you are eligible to invest in this scheme. The account can be opened with a minimum deposit of Rs 1,000 and a maximum limit of Rs 15 lakhs. Do note that the scheme comes with a lock-in period of 5 years. If the interest income exceeds Rs 50,000 in a financial year, investors will receive the amount after deducting TDS.

Premature closure of account is allowed on the following conditions:

Upto 1 year - After deducting any quarterly interest payment

From 1 year - Up to 2 years - Amount will be paid after deducting charges @1.5% of the balance deposit

On or after expiry of 2 years - Amount will be paid after deducting charges @1% of the balance deposit

Pradhan Mantri Vyay Vandana Yojana (PMVVY)

PMVVY is a government-sponsored savings scheme, launched to protect elderly persons aged 60 years and above against a drop in interest income due to uncertain market conditions. The scheme is being implemented through Life Insurance Corporation (LIC) of India. Do note that PMVVY does not provide tax deduction benefit under section 80C of the Income Tax Act.

Subscribers get an assured pension based on a guaranteed rate of return of 7.4% per annum (for FY 2020-21). They can opt for monthly, quarterly, half-yearly or an annual payout with this plan as per their financial requirements and convenience.

The maximum policy term is 10 years. In case of death of the subscriber during the policy term, the nominee is entitled to receive an entire purchase amount as a claim on submitting required documents. Moreover, individuals can avail of a loan against the scheme after completing three successful policy years.

National Saving Certificate (NSC)

NSC, a saving scheme introduced by the government of India, is a secure and low-risk investment. You can purchase this scheme from any post office by submitting the necessary documents and completing the KYC process. Investment in NSC earns a fixed interest rate, which is currently at 6.8% per annum. Minimum investment amount in the scheme is Rs 1,000 and the maturity period is five years. Investments in NSC qualify for income tax exemption under Section 80C up to Rs 150,000 per financial year.

So if you are looking for a safe investment avenue that provides a steady income, you can opt for this scheme. Note that HUFs and Trusts cannot invest in this scheme as it is available only for individual Indian citizens. NSC can also be used as collateral to avail of loans from Banks and NBFCs. Generally, investors are not permitted a premature exit, except in exceptional circumstances such as the investor's demise.

Post Office Monthly Income Scheme (POMIS)

POMIS is another government-backed scheme which comes under the purview of the Finance Ministry. This low-risk scheme helps you earn a steady income. You can start investing with a nominal amount of Rs 1,500. Maximum investment allowed is Rs 4.5 lakhs for individuals and Rs 9 lakh in case of a joint account. Investment period is five years.

Currently, interest rate is applicable at 6.6% per annum, payable monthly. Though the interest rate is low, it is higher than what most FDs are offering nowadays. One drawback of the scheme is that investment under it is not eligible for deduction section 80C of the Income Tax Act.

In case of premature withdrawals, following conditions will be applicable:

Before one year: No benefits

Between 1st and 3rd year: Amount refunded after charging 2% penalty

Between 3rd and 5th year: Amount refunded after charging 1% penalty

Are there any other alternatives?

Keep in mind that interest on the above mentioned schemes are on the downward trend in line with RBI's rate cut, but they still offer higher returns than Bank FDs. These schemes are backed by government and are therefore low-risk. You can consider investing in it for safety of deposit and regular income.

If you are willing to earn slightly higher risk in order to earn higher returns, you can consider allocating some of your corpus to Banking and PSU Debt Funds and/or Liquid Funds.

Banking and PSU Debt Funds predominantly invest in government and quasi-government securities along with some exposure to top names in the banking industry. These companies enjoy high-credit rating and government backing which makes it highly liquid and less prone to credit risk. In terms of returns, Banking and PSU Debt Fund has a good performance track record.

Table 2: Banking and PSU Debt Funds and Liquid Funds provide better safety of capital

Scheme Absolute (%) CAGR (%)
6 Months 1 Year 3 Years 5 Years
Category Average - Banking and PSU Debt Funds 5.83 10.96 8.46 8.72
Category Average - Liquid Funds 2.53 5.54 6.54 6.88
Data as on June 16, 2020
(Source: ACE MF)

Whereas, liquid funds are low duration funds which are perceived to be the safest in the debt funds category. A Liquid Fund is suitable if you have a very low-risk appetite (prefer safety and liquidity over returns), wish to park money for the short-term, for contingency planning, to address short-term goals, and/or to tactically shift money from an equity fund (via the Systematic Transfer Plan) to offset volatility.

Before selecting any avenue to park your hard-earned money, carefully analyse the options and take an informed decision. Go through the scheme documents carefully to understand the benefits, risks involved, maturity profile, tax benefits, among others. If you need help in deciding suitable scheme for your needs, consult a financial advisor.

 

Warm Regards,
Divya Grover
Research Analyst

 

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