Industry

Ask Us: on investments after retirement

Senior couple sitting on rocking chairs. Man and woman are having tea on sunny day. They are resting at home.

Senior couple sitting on rocking chairs. Man and woman are having tea on sunny day. They are resting at home.  

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Endowment plans also yield very modest returns that barely match savings deposit rates.

Investing retirement proceeds

Q. My dad recently retired from service in a PSU bank. He received a lump sum of about ₹25 lakh. I have the following questions:

1. How and where should he invest this money for optimum returns? He will be getting a monthly pension of about ₹40,000 2. Should he buy a health insurance plan as the bank's group insurance is over now?

3. He had purchased an endowment insurance plan three years ago and he wants to discontinue investing in it given the low amount of actual return.

Would it be wise to do so or should he continue investing in it for the full term which is another 13 years with an annual premium payment of about ₹1.15 lakh?

Navdeep

A. Your father can invest ₹15 lakh of these proceeds in the post office Senior Citizens Savings Scheme. The scheme is absolutely safe being a Central government scheme and also offers an attractive return of 8.6%, for investments made until December 31, 2019. The scheme pays quarterly interest and if your father doesn’t need the income, he can reinvest it in FDs or bank deposits.

The remaining ₹10 lakh needs to be invested based on what his objectives are. If he would like to preserve capital, he can invest the money in FDs of highly-rated NBFCs such as Sundaram Finance or Mahindra Finance. But if he can take on a higher risk profile to generate an inflation-beating return, he can consider conservative hybrid mutual funds, which invest 80% of their portfolio in bonds and 20% in equities.

Such funds yield tax-efficient returns because sums parked in their growth option are taxed at a 20% capital gains tax rate after adjusting the returns for inflation, provided they are held for three-plus years.

Yes, he should buy a health insurance plan to cover him in his post-retirement years.

An endowment plan with such a high premium commitment will deplete his savings post retirement.

Endowment plans also yield very modest returns that barely match savings deposit rates.

He should discontinue the plan even if it means losing a good part of the premium paid earlier. The future premiums saved can be reinvested in FDs or mutual funds for a better return, with greater liquidity.

Multiplying money

Q. My father retired from his job in January 2019. Now he has a capital of ₹10 lakh to invest in the market. Can you give me some options to multiply the money efficiently? I need to see considerable growth every three years along with an option for any-time withdrawal.

Sritam

A. We hope your father has made provisions for his living expenses post retirement, medical expenses and emergency needs before deciding to invest this money in the markets.

If not, he should prioritise those first. Frankly, there are no market-related options that can multiply your money within three years. The most suitable market-related options for a three-year horizon are short-term debt mutual funds. They can deliver a 7-8% return and the appreciation you earn from the growth option of these funds is taxed at 20% after adjusting for inflation.

Hybrid mutual funds investing in a mix of debt and equity can deliver a slightly higher return. But a three-year horizon is too short to expect such funds to work miracles.

Over such short periods, you would run the risk of a capital loss or low returns from fluctuations in the stock market.

Investing directly in stocks or equity funds should also be ruled out with a three-year horizon, as there would not be enough time for your portfolio to recover from any sharp market fall or a bear market.

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Printable version | Dec 8, 2019 2:14:04 AM | https://www.thehindu.com/business/Industry/ask-us/article30126052.ece

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