Q. My dad is retiring this month from service. He will get a substantial lump sum in the form of gratuity, provident fund and other dues. How should he invest this money?
A. We assume a key goal, post-retirement, will be to earn regular cash flows to either meet his living expenses or supplement the pension he’s receiving from his employer.
Apart from this, even after retirement, it is important to have a growth component to one’s portfolio that can grow one’s capital to keep up with inflation. Without this, the capital investments may lose value with time, given the bite of inflation. Presently, after sharp cuts in interest rates by the Monetary Policy Committee, fixed deposits from leading banks offer interest rates of 6.1-6.5% (taxable) for 1- to 5-year terms which are quite unattractive. We can suggest three other regular income options that offer a better combination of safety with returns.
Your father can park the first ₹15 lakh of his retirement proceeds in the Senior Citizens Savings Scheme offered by the post office and also available at leading banks. This is a government-backed small savings scheme on which the Centre resets interest rates each quarter. For the current January to March 31 2020 quarter, the rate offered is 8.6% per annum, which is far higher than the rates on bank deposits. Investments are locked in for five years, with extension of the maturity date allowed after five years. Interest is paid out on a quarterly basis to the investor.
A second scheme is the Pradhan Mantri Vaya Vandana Yojana from LIC which allows an upfront investment of up to ₹15 lakh per individual. The scheme pays out guaranteed pensions on a monthly, quarterly, half-yearly or yearly basis at rates of 8%, 8.05%, 8.13% or 8.3% respectively on initial investment. The scheme carries a 10-year lock-in period. If the policy purchaser doesn’t survive the term, the purchase price is refunded to the nominee.
A third option is to invest in GOI Savings Bonds that offer 7.75% interest per annum. The bonds, available on tap from banks, lock in the investor’s money for 7 years and allow you to earn either regular interest payouts or a cumulative value at maturity. The bonds need to be held to maturity and are unlisted and non-transferable. The interest on all of the above options is taxable and the post-tax interest, depending on your father’s tax slab, may be lower than the rates mentioned above. However, these schemes still score for their high interest rates compared with bank deposits despite their high safety as central government-backed schemes.
After deploying 75% of his retirement proceeds in the above three options, your father should invest about 25% of his capital in a multi-cap equity fund with a good track record. This investment should be in the growth option so that it can deliver capital appreciation that will boost his portfolio returns to keep up with inflation.
Apart from these options, your father should also have some money, equal to nine months’ living expenses, parked in a deposit with a leading bank that can be withdrawn at any time for emergencies. It would be wise to get a health insurance cover to protect his finances from medical emergencies.
Q. I'm 22 and earn ₹3 lakh a year. I don't have any expenses as I am staying with my parents. I want to know where to invest the money so that it will give me good returns.
A. Your choice of investment options will depend on what you want to save up towards. It would be a good idea to map out your financial goals over the next one year, 3-5 years and longer time frames. Once you have such goals in place, you’ll need to quantify the target corpus for each.
For 1-year goals, we suggest you use a recurring deposit with a leading bank to invest. For 1-3 year goals, fixed deposits or SIPs in short-duration debt mutual funds would be ideal. For 3-5 year terms, the post office time deposit or corporate bond mutual funds that invest mainly in safe instruments would be good options. Towards more-than-5-year goals, you can invest in SIPs in multi-cap equity funds. When choosing funds, be sure to select those with a good 10-year record of outperforming their benchmarks and category, or take the help of a qualified adviser.