Capital Preservation: The Key for Senior Citizens’ Investment in a Falling Interest Rate Regime

Risk Adjusted Return the Key to Investment for the Elderly and Senior Citizens in India.

?'Interest rates are at an all-time low in the Indian Economy, thereby given a major boost to credit off-take. However, a falling interest rate regime is not the ideal scenario for Senior Citizens and the Elderly as the only source of income is via investment made which are largely dependent on interest rates prevalent. Lower the interest rate, lower the overall income. With an increased life expectancy risk adjusted investment is the key.’

?The Indian economy has passed through very turbulent times in the past 18 months. With the pandemic taking a toll on most sectors in the economy due to the stringent lockdowns imposed across the country, a fine balance was needed to be created between life and livelihood. Millions of SME companies that employ a large majority of the Indian population shut down and lakhs of people lost their jobs. In order to boost the economy both fiscal as well as monetary steps needed to be taken. The Government extended tremendous support on the fiscal side to support the overall economy and special packages to the sectors that were most affected were given. On the monetary side RBI came out with a number of initiatives to help the overall economy and one of the most significant steps taken was to reduce the interest rate to all time low in the Indian economy. Lower the interest rate easier would be the credit burden and greater the credit off-take. This has been implemented the world over very effectively to boost the overall economy and increase the overall GDP.

?With all positives for a low interest rate scenario, fixed income/non-equity investment the yields/returns have come to its all-time low. Senior citizens/elderly who have put their lifetime earnings which is their only source of income via the interest that these investments earn, due to the low interest rates this has resulted in a major problem for their overall income. With bank Fixed Deposits (FD) being the most common avenue for their investment is not giving the appropriate returns. In most cases the bank FD return being around 6% p.a., survival on such income has become a very big issue for this category of investors.

?In a falling interest rate scenario, most of the investments have been channelized into the equity markets. With the majority of the volume in the stock markets is driven by retail investors and most of them are first time investors who have invested in the stock markets. With a record number of Demat accounts been opened in the last 15 months, the equity market option seems a very attractive option for investing in India. However, for senior citizens, the entry into the equity market at this valuation and with Sensex at all-time high may not be the most advisable option.

?Equity investment as an overall percentage of one’s portfolio should be taken as 100 minus one’s age. Example if one’s age is 40 years then (100-40 = 60), one’s equity exposure at an overall portfolio level should be a maximum of 60%. Going by the same logic for the elderly and senior citizen the equity exposure should not be more than 25-30%. The key to remember is that if historic investments have been made into equity, in good blue-chip companies, there is no need to panic as there is a decent dividend yield that one will get in the range of 2-3% in most stocks and since these stocks have been bought at a historical value they are already 10-15(x). Hence even a correction from these levels will not result in overall wealth destruction.

?The key for senior citizens is capital conservation. The return could be lower but overall wealth that has been accounted should not get destroyed as there is no fresh earning potential and the amount of money is all that is there till the lifetime expectancy. With the evaluation of medical science, overall life expectancy in India has gone up thereby the significance of capital preservation and risk adjusted returns is even more.

World over headcount of people aged 65 and above, which constituted 703 million people in 2019, will double to 1.5 billion in 2050, thus accounting for 16% of the world population. India’s elderly population will rise from its current 60 million to over 227 million by 2050. Accordingly, the old-age dependency ratio will rise from 9.8 to 20.3 thereby adding further pressure on the pension and social security system in India. With around 9% of Indian population as senior citizens and elderly, appropriate investment avenues and overall portfolio options are the need of the hour. Other than the conventional bank deposit investment option, some of the appropriate investment options for senior citizens are as follows:

?·??????Senior Citizen Saving Scheme (SCSS)

?Interest rate: 7.4%, Payable: Quarterly

SCSS is for a period of 5 years and more than one account may be opened, but the total limit is capped at INR 15 lakhs. Interest earned in SCSS is fully taxable and is to be added to one’s income from other sources.

?·??????Pradhan Mantri Vaya Vandana Yojana (PMVVY)

?Interest rate: 7.4 %, Payable: Monthly, Tenure: 10 years

PMVVY scheme will help senior citizens as the entry age in the scheme is 60 years. For the first financial year i.e. up to 31st March 2021, the Scheme was providing an assured pension of 7.40% p.a. payable monthly and thereafter to be reset every year.

·??????Post Office Monthly Income Scheme (POMIS)

?Interest rate: 6.6% Payable: Monthly, Tenure: 5 years

Once invested the interest rate continues to remain the same till maturity. Currently, for the quarter ending June 2021, the interest rate is 6.6% p.a. One can invest a maximum of INR 4.5 lakhs in a single name while a maximum of INR 9 lakhs can be deposited in POMIS in a joint name.

·??????Floating Rate Savings Bonds

?Interest rate: 7.15%, Payable: Half-yearly, Tenure: 7 years

The coupon rate for the first coupon period, payable on 01st January 2021 was fixed at 7.15%. The coupon rate will be linked/pegged with the prevailing National Saving Certificate (NSC) rate with a spread of 35 basis points over the NSC interest rate.

·??????RBI Savings Bonds

?These bonds are currently offering 7.75% p.a. There is no maximum limit in investing in these bonds. The bonds have tenure of 7 years.

·??????Immediate Annuity Schemes

?Provided by LIC and other insurance companies, helps the investor get a fixed rate of return locked-in till the lifetime of the person and his spouse. It may be with return of principal amount or without yields are in the region of 6% p.a. at present.

?With India celebrating its 75th Independence Day and marching towards a USD 5 trillion economy and thereby making the transition from a developing to a developed country this nation has been built by the hard work and sweat of the senior citizens of today. The complete transition from being a free democratic country to the making of a superpower has happened in their lifetime. In these turbulent times where the economy is still recovering by stock markets at all-time high, senior citizens should not get carried away or misguided of investing all their hard earned money in the stock markets rather have a risk based portfolio wherein fixed income options listed above are chosen and not more than 25-30% of the total portfolio is invested inequities.

?_Farzan Ghadially.?