Fixed-income options after 7.75% bond
PMVVY, SCSS, PPF and Bharat Bond are instruments senior citizens can turn to
The Reserve Bank of India (RBI) announced recently that the 7.75 per cent Savings (Taxable) Bonds, 2018 would not be available for investment from May 29, 2020. At a time when the yield on the 10-year government bond has fallen to around 5.78 per cent, paying such a high rate of return on this instrument had become unviable. These bonds were an excellent investment avenue both for regular investors and senior citizens, as they combined high returns with high safety.
Should senior citizens stick only to fixed deposits (FDS) now? “No,” says Tarun Birani, founder and CEO,
TBNG Capital Advisors. Interest rates on FDS offered by the larger banks are no longer attractive. The State Bank of India’s one-year FD pays 5.1 per cent to regular investors and 5.6 per cent to senior citizens. The five-year rates are 5.4 per cent and 6.20 per cent respectively. Says Birani: “The only FDS that offer decent returns are those from Small Finance Banks. But in the current scenario, it would not be worthwhile for senior citizens to take the risk of investing in them just for a few extra basis points.”
If not FDS, then what other options do seniors have? Says Ranjit Dani, certified financial planner and founder-director of Think Consultants: “Senior citizens do have a few options like Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS). These can also be used to generate a regular income.
PMVVY: This scheme is sold only by the Life Insurance Corporation (LIC) of India. It is a non-linked and non-participating pension scheme that will be available to investors until March 31, 2023. Says Dani: “The scheme has a term of 10 years. You can opt for
a monthly, quarterly, half-yearly or annual pension. Its ideal for senior citizens looking for a regular income.” Currently it offers an interest rate of 7.4 per cent per annum. An individual can invest up to ~15 lakh and earn a maximum pension of ~9,250. If both spouses invest ~15 lakh each, they can earn a pension of ~18,500 per month.
SCSS: It currently offers an interest rate of 7.4 per cent per annum. The interest rate is reviewed quarterly and can change. SCSS has a tenure of five years. Interest from SCSS is credited quarterly. Says Birani: “It gives decent returns as well as a certain amount of liquidity, as compared to PMVVY.” SCSS offers interest liquidity but not on the principal amount. Says M Barve, founder, MB Wealth Financial Solutions: “Invest in SCSS to get safe, fixed and regular cash flow and for 80C deduction. Invest ~15 lakh with you as the first account holder and your spouse as the second holder. Open another SCSS, invest another ~15 lakh and there have your spouse as the first holder and you as the second.”
The Public Provident Fund (PPF), which offers 7.1 per cent tax-free return, remains an evergreen option. Debt mutual funds: This is another fixed-income option that investors may consider. Says Barve: “You can opt for systematic withdrawal plans (SWP) in debt mutual funds for regular income.” SWP enables investors to withdraw a specified amount regularly. Says Birani: “Among debt funds, consider investing in Bharat Bond Fund of Fund (FOF), since it invests 100 per cent in PSU papers.” The current yield to maturity on the 2030 ETF is 6.84 per cent and on the 2023 ETF is 5.76 per cent. Banking and PSU Bond Funds are another relatively low-risk category of debt fund you may consider.