Can Senior Citizens Solely Depend on Fixed Income Instruments for their Retirement Needs?

Feb 17, 2021

The Indian equity markets are refusing to take a breather, rallying overpoweringly post the Union Budget 2021. Some announcements made by Ms Nirmala Sitharaman in her budget speech, viz., more spending on infrastructure, healthcare, and education among others have excited the markets and set the bulls raging. It is perceived that the Union Budget 2021 would kick-start the engine of economic growth (after the adverse impact of the COVID-19 crisis).

However, senior citizens who predominantly depend on fixed income instruments found no reason to cheer--except for some relief from filing income tax returns to those age 75 years and above and whose only source of income is pension and interests.

With policy rates being reduced by the Reserve Bank of India (RBI) to address growth concerns, the most adversely affected individual investors have been retirees, who depend on mostly fixed-income investments to manage their monthly expenses.

Table 1: Interest rates of Small Savings Schemes

What increases the stress on their savings and income is retail inflation, which erodes the purchasing power of money.

The RBI has highlighted the risk to inflation trajectory in its Monetary Policy Statement, dated February 5, 2021. But despite this, interest rates on bank fixed deposits and Small Savings Schemes (SSS) are expected to remain low.

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Wondering why?

Well, first, the six-member Monetary Policy Committee (MPC) decided to continue with the accommodative stance for as long as necessary--at least during the current financial year and into the next financial year--to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy.

Second, the government is borrowing aggressively. The full-year borrowing program of the government in the current fiscal year is Rs 12.80 lakh crore. For the next fiscal year, i.e. 2021-22, the Union Budget 2021 states that it would be around Rs 12 lakh crore. Basically, when the government borrows aggressively, it cannot let the interest cost burden to rise faster than the nominal GDP growth, else servicing the borrowings becomes a critical issue.

The Indian bond markets are already worried about higher government borrowings, as the country already has a debt-to-GDP ratio of nearly 70%. Plus, the fiscal deficit target has widened to 9.5% of GDP for the current fiscal year, while it is estimated to be 6.8% of the GDP in the next fiscal year i.e. 2021-22, and then expect it to gradually reduce to 4.5% of GDP by the fiscal year 2025-26.

These decisions of the government to support growth by keeping fiscal deficit targets on the back burner might not go well with senior citizens--as it means that interest would stay low for now.

If you may remember, the government typically borrowed Rs 4.5-6 lakh crore every financial year, about 8-10 years ago and then 10-Year G-sec yields hovered around 8%. Higher interest burden kept the government borrowings in check. Thereafter, inflation came off sharply in the next few years and bond yields followed.

Today, we are facing a dissimilar situation. The yields have anchored around 6% levels with RBI's timely intervention on liquidity management and the government's borrowing has shot up substantially doubled in the last 8-10 years.

In my view, the next few years may not be very different. The question is how long the yields can stay lower if the RBI decides to tolerate inflationary pressures up to a point. You see, it is the 10-year G-sec yields that set the tone for the interest rates on Small Saving Schemes.

With interest on Small Saving Scheme rates reduced, and lower borrowing cost (pursuant to RBI's monetary policy action), banks too have cut interest rates on Fixed Deposits (FDs).

Table 2: Interest rates on bank FDs

The real returns (also known as inflation-adjusted returns) earned on bank fixed deposits and Small Saving Schemes is barely anything, and in some cases even negative. As a senior citizen, if you thought longer tenure deposits could offer a higher return, you will be disappointed. And to top it up, interest over Rs 50,000 per annum is taxable under 'Income From Other Sources' as per your tax slab.

As a retiree, if you rely entirely on fixed income instruments, you may not be able to meet your retirement needs comfortably. You would feel the pinch of the rising cost of living, particularly in metro or Tier-I cities.

To make up for the rising cost of living, it makes sense for senior citizens to allocate 25-30% of the investment pool to equities via diversified equity-oriented mutual funds. You may consider amongst the best Large-cap Fund, a Multi-cap Fund, and an Aggressive Hybrid Fund and diversify your holdings sensibly.

Choose schemes after you have assessed a host of quantitative and qualitative parameters, and not just the past returns, because it may not be indicative of the future returns. Also, understand the investment philosophy, processes, and systems followed at the mutual fund house. This would enable you to make a prudent choice, take a calculated risk, and potentially maximise returns.

If you already hold certain equity-oriented mutual fund schemes, I suggest seek professional advice to review and rebalance your mutual fund portfolio, it may help you...

If you are clueless about where to look and whom to approach, I strongly suggest that you opt for PersonalFN's Mutual Fund Portfolio Review service.

Coming to how you, as a retiree, can earn a regular income, here are four ways:

Keep in mind, effective financial planning with suitable asset allocation will help you live a blissful, rich, and a fulfilling retired life -without having to worry about how you would meet the expenses.

Happy Investing!

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

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