There are several guaranteed return schemes created especially for senior citizens, including the Senior Citizen Savings Scheme (SCSS) and higher-interest rate fixed deposit (FD) plans. Currently, the SCSS offers an interest rate of 8.2 per cent annually.
Until now, debt funds have been popular because of the long-term capital gains tax and indexation benefits. However, these benefits were removed on April 1, 2023, raising doubts that debt mutual funds may no longer be appealing to investors.
Yet, in April 2023, the first month after the changes in the tax rules, debt funds’ net inflow rose to Rs 1.07 lakh crore. Given this robust traction and the high-interest rate cycle, could these non-guaranteed schemes also be a viable investment option for retired people?
Let’s hear what experts say.
Rushabh Desai, founder of Rupee With Rushabh Investment Services, says, “Even though the indexation tax benefit is removed from debt funds, they still stand a better chance in delivering superior risk-adjusted returns compared to FDs. The major reason for this is that debt funds are market-linked products. So when the interest rates fall, debt funds will start to gain at the mark-to-market level. Since FDs don’t have this benefit, debt funds can give higher returns.”
The best approach is to diversify the fixed-income space with debt funds, FDs, and government schemes, says Desai, adding, “I would prefer a higher allocation to debt funds. One can look at corporate bond funds, banking and PSU (public sector undertaking) funds, G-Secs (government securities), and SDL (state development loan) funds.”
Note that debt funds invest in debt securities but do not offer guaranteed returns. Generally, people invest in guaranteed returns for financial safety after retirement, although it may not hold true for everyone. Some may be willing to take higher risks and opt for non-guaranteed avenues.
Shweta Jain, the founder of Investography Pvt. Ltd., states, “Debt funds are good for anyone who wants stability. Retired folks can invest in debt funds provided they are ok with returns being non-guaranteed. Use it as a diversification tool. Debt funds tend to give lower returns when interest rates are moving upward. However, we will see better returns once the interest cycle reverses.”
The price of debt securities rises when the interest rates fall and vice-versa. In this context, since the consumer price index (CPI) in April 2023 has come down to 4.7 per cent from 5.66 per cent in March 2023, there are chances that the interest rate may reduce as the current inflation rate is within the Reserve Bank of India’s target range.
From April 1, 2023, income from debt funds is taxable as per the individual’s tax slab, similar to FDs. However, while FDs give guaranteed returns, debt funds do not guarantee a fixed return but provide an opportunity for higher returns.
Desai advises senior citizens to consider the debt funds’ maturity profile before investing. “One will need to match the time horizon with the maturity profile of the fund. For example, the AAA corporate bond yields are in the range of 7-8 per cent at the moment, and during the interest rate cut cycle, we see higher returns at the mark-to-market level.”
So seniors, depending on their risk appetite, can include debt funds to diversify their portfolios. Jain recommends SCSS for senior citizens if they do not need liquidity; otherwise, the portfolio should combine FDs and debt funds. She adds that debt funds could be 20-50 per cent, depending on the cash flow requirement.