Three investment options for senior citizens to beat inflation
PremiumInflation is one of the biggest risks investors face, as it reduces the purchasing power of money
Inflation is one of the biggest risks investors face, as it reduces the purchasing power of money. So, if a good is worth ₹100 now, then at the end of the year, you would need ₹106 to buy the same product if the rate of inflation is 6%.
For people such as retirees, it can be a bigger problem as this may lead them to eating into their retirement corpus if they are not investing in an instrument that gives them inflation-beating returns.
As most retirees in general prefer traditional fixed income instruments, such as fixed deposits or post office saving schemes, it will be difficult for them to beat inflation.
Right now, State Bank of India is offering an interest of 5% on a one-year bank fixed deposit, while the retail inflation for the month of June was above 6%. Therefore, the real rate of return for an FD investor will be negative.
Therefore, for people such as retirees, high inflation and low interest rates are acting like a double-edged sword. The solution to this could be investing in equities, but not all, especially retirees, may have the risk appetite for the same.
So, there should be an instrument that can provide inflation-beating returns. The Reserve Bank of India (RBI) had come out with inflation-indexed bonds (IIBs) in 2013. These bonds didn’t find many takers as the product structure was not investor friendly, say experts. Plus, the bonds lost appeal when they were pegged to the wholesale price index, which turned negative after they were launched. Therefore, the central bank has not issued IIBs after 2013.
Some experts, however, feel the government should reconsider launching these bonds.
“Globally, IIBs are widely used to hedge against inflation and deliver inflation-adjusted returns to investors in tune with the global markets. Given the current market situation, where uncertainty is high, the government may consider reintroducing the IIB," said Rishad Manekia, founder and managing director, Kairos Capital.
Currently, though, the following debt options are able to deliver inflation-beating returns.
Floating-rate RBI bonds: These are bonds issued by the RBI and the interest rate is linked to that of National Savings Certificate (NSC) with a markup of 35 basis points (bps). One basis point is one-hundredth of a percentage.
The interest on the bonds is payable semi-annually on 1 January and 1 July every year. The interest rate for the first half of 2021 has been set at 7.15%. The interest rate for the next half-year will be reset every six months.
There is no option to pay interest on a cumulative basis. These bonds have a tenor of seven years, and the interest earned on these bonds is fully taxable.
Senior Citizens Savings Schemes (SCSS): For senior citizens, SCSS is a good option as they are offering an interest rate of 7.4% per annum. It is reviewed quarterly.
The maximum limit on investment is ₹15 lakh per person. Interest is payable quarterly and the sum is fully taxable. Also, tax deducted at source (TDS) will be applicable in case the interest amount is above ₹50,000 for the year.
Credit risk funds: The two options discussed earlier come with sovereign guarantee and, therefore, there is no risk of losing principal. However, as the interest earned is fully taxable, the post-tax return may not be as attractive. Alternatively, there are mutual funds such as credit risk that invest in debt instruments with higher yield that are generally below the highest rating grade. While investing in these funds, one has to be mindful of the credit risk (fall in the net asset value of the fund due to default in principal or interest repayment by the company in whose debt paper the fund has invested).
These funds have delivered a return of 8.12% over the past one year. The gains after three years are considered as long-term and are taxed at 20% post indexation, which reduces the tax liability considerably.
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