Falling Interest Rates and Retirees
The Interest Rates in our economy are on a downwards spiral.
RBI in its Monetary Policy on 4th Oct cut the repo rate or the key lending rate by 25bps while maintaining an accomodative stance. This is the fifth consecutive rate cut aggregating to 135 bps.
Low Interest rates spur economic growth & benefit the borrowers but presents a special challenge to those in or nearing retirement.
Let us explore the options where one can invest in this scenario :
Invest in Senior Citizen Government Schemes
Currently the retirees have the option of investing in following schemes. The below mentioned schemes are best for the investors who are in the lower tax brackets.
| Name of the Schemes | Amount | ROI | Tenure | Pension payment options |
| Senior Citizen Savings scheme – Bank | 1,500,000 | 8.60% | 5 years | Quarterly |
| Max Limit : Rs 15 lacs | ||||
| Senior Citizen Savings scheme – POST | 1,500,000 | 8.60% | 5 years | Quarterly |
| Pradhan Mantri Vaya Vandan Yojna | 1,500,000 | 8.00%* | 10 years | Monthly. Qtrly, half yearly & Annual Options |
| *8% for monthly & 8.30% for Annual | ||||
| Immediate Annuity Plans of Insurance companies like LIC etc | No limit | 6.7% -6.75% | Interest Rate is fixed for lifetime | Monthly. Qtrly, half yearly & Annual Options |
| Deffered Annuity Plans | No limit | 6.5%- 6.75% | Interest Rate is fixed for lifetime | Monthly. Qtrly, half yearly & Annual Options |
Public Provident Fund – PPF
One can invest Rs 1.50 lacs per annum in the PPF Account. The Current ROI is 7.90% which is tax free.
Tax Free Bonds
Tax Free Bonds are issued by govt entities for a long term period say 10-20 years. The interest earned is tax free therefore TDS is not deducted on the same. Investment in the bonds is preferred by HNIs and Institutional Investors. They have less liquidity compared to debt funds and have higher lock in period.
The rate of Interest on the bonds generally range from 5.50%-6.50%, which is attractive considering the tax exemption. The Interest payment is made annually. The Rates are subject to fluctuations as they are linked to rate of Government Securities at the time of issue.
Debt Funds
A. For Short Term Parking – Ultra Short Term funds/ Arbitrage Funds
State bank of India recently announced rate cut on its savings accounts. If you have funds which lie idle in a savings fund, do invest them in a Ultra Short Term Funds or Arbitrage Funds
The Ultra Short term fund category has generated average return of 8.16% last year. The Arbitrage category is advised for investors in higher tax brackets. It has generated average returns of 6.87% last year.
B. Invest in Constant Maturity Debt Fund
Gilt Funds with Constant Duration are recommended as long interest maturities benefit the most in falling interest rate environment. It also removes the element of human error- the risk of wrong duration call by the fund manager.
The bond Prices have an inverse relationship with the Yields. When the yields fall with lowering of rates the price of Bonds rise which benefit the investors.
The constant maturity funds have generated anywhere between 15% to 20% return last year as the yields have fallen from 8% plus to 6.68% currently.
The Funds are advised only for investors who understand the debt funds and can withstand the volatility attached with it. The Funds are preferred as interest rates are likely to soften further.
C. Invest in Dynamic Asset Allocation – Balance Funds – Opt for SWPs for regular Income
The Dynamic Asset allocation funds normally invest 50-60% in Debt + Arbitrage and rest in equities. The Category as a whole has developed good acceptance among the retail investors who usually used to invest only in fixed deposits.
The SWP feature also helps the retail investor have the regular income with tax efficient structure and the chance of capital growth is also higher.
The category has generated an average return of close to 6% last year.
The Financial well being of an individual depends on various factors. Weigh all your options with care and then finalize.