3 Things You Should Know About Debt Fund, FD, Small Saving Deposits

A senior citizen has three investable options in the low-to-medium risk category post-retirement but they must carefully scrutinise them for suitability.

Neelanjit Das
May 1, 2023
3 Things You Should Know About Debt Fund, FD, Small Saving Deposits

Most senior citizens are generally risk-averse as the earning opportunities decrease significantly post-retirement, although exceptions exist.


Generally, most people want to retire with a lump sum to take care of their day-to-day needs and live peacefully.

As such, seniors prefer to invest in low-risk instruments like a bank’s fixed deposit, small saving schemes, post office schemes, low-risk debt mutual funds, etc.

However, these instruments depend on the interest rate cycles in the market at a given time and as specified by the Reserve Bank of India (RBI).

According to Ankit Gupta, founder, BondsIndia.com, a online bonds platform, pricing of the bonds (especially gilt and higher rated bonds) and the NAV of the debt funds are ultra-sensitive to the changes in the interest rate regime. A rising interest rate regime brings down the prices of the bonds and NAV of the debt funds.

So, as the current interest rates are relatively high, which financial instrument makes more sense for investing?

The following are some investment trends observed in the market.

Table showing small savings investment structure trends .Source: Bank of Baroda

Small Savings Deposits 

Data from the Bank of Baroda (BoB) showed that saving certificates formed the largest share of small savings deposits, while Public Provident Fund (PPF) had the lowest share at 7.6 per cent share.

Savings certificates include instruments like national savings certificates (NSC), Kisan Vikas Patra (KVP), Indira Vikas Patra, etc.

Where Should A Senior Citizen Invest?

Risk-averse senior citizens can invest in small saving deposits and certificates, bank fixed deposits, and low-risk debt mutual funds. But before doing that, they should carefully evaluate the suitability of these products.

Nehal Mota, co-founder and CEO of Finnovate, a Mumbai-based financial planning company, has advised senior citizens to invest in a mix of small savings, certificate schemes, conservative hybrid mutual funds, and bank FDs for fixed income.

Gupta said that conservative investors to adhere to short-term debt categories like liquid and money market funds as they tends to benefit from the rising interest rates. Duration plays a vital role (in case of bonds) and is used to measure the sensitivity of a bond’s price to changes in interest rates. The higher the duration, the more a bond’s price will drop as interest rates rise.

Three Things To Consider Before Investing

Interest rates and market risks are not the only factors to consider before investing.

● Fungibility: Fungibility of any investment instrument should be an important factor to consider, especially for a senior citizen.

For example: An ultra-low duration and low-duration debt mutual fund have no exit load nor has any withdrawal restrictions. Fixed deposits can be prematurely withdrawn but charges may apply depending on the bank.

PPF has a 15-year lock-in, and Kisan Vikas Patra has a 123-month lock-in. Senior citizen savings scheme has a lock-in of five years. Some banks also have overdraft facility on FDs, which give up to 80 to 85 per cent of the fixed deposit amount.

Abhijit Talukdar, founder of Attainix Consulting and a Sebi-registered investment advisor, said seniors should thoroughly check the exit loads, lock-in periods and other details before making a decision. They should always keep some cash in hand or invest in short-term fixed deposit schemes for emergencies.

● Taxability: Interest earned on FDs are subject to tax, and above a certain limit, banks will also deduct TDS. Senior citizens have a higher TDS limit and banks also enhance the interest rates for time deposits. Seniors can also avail of a tax-free FD, which has a lock-in period of 5 years.

Debt mutual funds are taxed irrespective of a person’s age. However, there is an indexation benefit that adjusts gains with inflation, if long-term capital gains tax is applied. CA  Abhishek Y. Bhavsar, a practising chartered accountant in Ahmedabad, explains the treatment of taxation of debt funds and fixed deposits with an illustration. Assumptions made- both debt mutual fund and FD bought on April 2018 and sold on March 2022, FD had 8 per cent per annum interest and the senior citizen has an income above Rs 10 lac.

Table showing computation of tax Source: CA Abhishek Y. Bhavsar

● Stability of Returns: Debt mutual funds have no fixed interest rate. Returns come from interest paid in a bond or bill or by capital appreciation or depreciation during bond trading. FDs and other small savings schemes give fixed interest rate returns.

Talukdar has advised senior citizens looking for assured returns to open an FD, or invest in other small saving investments. If they want to take a higher risk, they can go for debt mutual funds.

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