Investment Guidelines for Senior Citizens

Last week, I had written an article about the rights and privileges granted to senior citizens in our country. I talked about various government schemes and policies that can help generate a regular source of income for the old and take care of their expenses. I would like to take this discussion forward by talking about the do’s and don’ts while choosing a policy or making investments for or as senior citizens.

Before starting with the guidelines, let me talk about the importance of investing even at old age because the general perception is that financial planning or retirement planning can be done only in the youth and the old are expected to rely on their savings. As must be obvious from my previous article, nothing could be further from the truth.

Inflation is a fact of life and a normal economic process. The hard money or cash sitting with you would diminish in value over a period of time due to inflationary forces. In fact, even the rate of return offered by a savings bank account is much lower than the rate of inflation. Think about it, can you buy the same number of things with Rs. 1,000 that you could buy 10 years back? Similarly, the retirement corpus that a senior citizen may have would diminish in value over time, if not invested. Investing the money in some senior citizen scheme can protect the old to some extent from inflation.

Having established the importance of investing even at old age, let’s begin with certain things to take care of when investing in a senior citizen scheme.

Safety of Investment Amount

The biggest concern of any senior citizen who is about to invest money somewhere is the safety of his money. There are two types of risks here: one, the person/ institution the senior citizen is investing with; and two, the type of financial instrument.

The first case is taken care of when one invests money in government schemes or with government institutions. They guarantee the safety of one’s money and its growth at a pre-determined rate of return. It is not that there are no reliable private wealth managers, just that they are affected by market risks beyond their control, which the government institutions are more or less immune to.

The second concern is the type of financial instrument that one invests in like equity schemes, debt schemes, bonds, etc. Government schemes guarantee a fixed rate of return (some with minor fluctuations periodically) that is pre-determined at the time of investment, unlike equity schemes that are dependent on the performance of the stock market and other economic factors. Many times, in the long-run, equity schemes give a higher rate of return than government schemes. However, there is no guarantee. There are phases when the reverse is also true. Therefore, senior citizens, who are usually retired and are dependent on their savings, cannot afford taking market risks. It is always advisable to go for government-supported schemes that assure safety of the amount invested. These schemes return the principal amount at the end of the investment term along with the last instalment of pension/ interest payment.

If a senior citizen’s risk appetite is high, he can always have a mixed portfolio of investment that can have both, equities and fixed return instruments. However, going only for a high-risk investment portfolio is not advisable at this stage of one’s life.

In Case of Death

As much as one would like to wish it away, ‘death’ is not something very far away for senior citizens. Therefore, it is important to consider what would happen to a senior citizen’s investments if he were to die before the end of the term of the investment. Most schemes give an option to specify the investor’s nominee in case of death. This is very important to ensure that the senior citizen’s loved ones are taken care of even after his death and the money is utilized in a manner that he deems fit.

Rate of Return

Even though return is assured in government schemes, the rate of return is an important point for consideration. Some schemes offer a fixed rate for the entire tenure while others offer a variable rate that is based on government policies of the time. In case of the latter, an investor should ensure that he understands the underlying factors.

The best way to do this is to review the 10-15 year history of the rate of returns. They will give an idea of the fluctuations. Such data is readily available online for free.

It is also important to understand the frequency of compounding interest; whether it is monthly, or quarterly, or semi-annually, or annually. For example, a scheme that compounds interest monthly at a rate of 10% would offer better returns as compared to the one compounding annually at the same rate of return. Even though the differences between these four methods would be small, one needs to be careful about these if one wants to maximize one’s returns.

Frequency of Payments

Everybody has different needs. While some senior citizens may need money monthly to meet their day-to-day expenses, the others may need it only once a year for their travel or other such big expenses. Therefore, while choosing a scheme for investment, an investor should see if it offers the flexibility of frequency of payment. Most schemes have an option to choose from monthly, quarterly, half-yearly, or yearly payments.

Lock-In Period

Many schemes have a lock-in period before which an investor cannot withdraw the principal amount. Therefore, it is important for a senior citizen to understand the duration for which he cannot use his invested principal amount and can avail only the pension or interest amount.

Some schemes offer an option for a pre-mature withdrawal, which means that after a certain period from the start date and before the maturity date, the investor can withdraw the invested amount. In such cases, the investor will have to pay an exit load, which is a fee charged by the scheme for withdrawing money before time. Usually, this fee is low somewhere around two per cent of the invested amount, but when it gets applied to a big amount, its value matters. Therefore, an investor should be aware of the implications of pre-mature withdrawal on his investments.

For senior citizens, it is always advisable to go for a scheme that has an option for pre-mature withdrawal as they can face an emergency any time that can demand huge sums. It may so happen that they may not need this at all, but it is always good to have such an option.

Increasing the Tenure

Sometimes, it may happen that a senior citizen does not need the principal amount at maturity and would like to keep getting returns. In such a case, some schemes have an option to increase the tenure of the scheme. It is always good to consider such an option at the start while choosing which scheme to invest in.

Loan Facility

Given the low levels of savings or income during old age, it is important to have an option of taking a loan against the investment corpus in times of emergencies. Many government-supported schemes do offer this option for senior citizens. The best part is that the elderly would not be expected to pay off the loan instalments from their savings, but they get adjusted against the interest/ pension payments.

Tax Benefits

Before investing, a senior citizen should also look at the tax benefits that a scheme offers. Some schemes offer an EEE, i.e., an exempt-exempt-exempt tax concession, which means the amount invested, the interest earned, and the maturity amount is all exempt from income tax. There are some that offer exemptions only at one or two of the three stages. An important point to note would that just because a scheme offers tax exemptions only at one or two stages does not mean that it is worse than an EEE scheme. Any scheme needs to be looked at holistically keeping other factors in mind, and this is just one of the many points for consideration. The important thing is that an investor should choose a scheme that maximizes his returns and minimizes the taxes.

Ease of Doing Business

For senior citizens, comfort and convenience are very important when dealing with an institution. The RBI has introduced doorstep banking for the comfort of senior citizens so that they do not have to step out and stand in long queues.

It is important for a senior citizen to understand the process of investing in a scheme. He needs to find out the location of the bank or institution where he would have to go, whether they would provide doorstep services to him, documents required, waiting period, number of iterations before the scheme starts, etc.

A senior citizen should find out if the institution investing with offers an option to deal with any other branch in case the senior citizen or the institution itself shifts to a new location. The transfer policy of the institution comes in handy in case of change of location.

A senior citizen should also understand the way to collect the pensions or interest amount. Most institutions, these days, credit the amount directly to the investor’s bank account. However, it is important to make sure of this before investing. Some senior citizens may want to get the amount delivered at home. In such a case, the investor should discuss with the institution beforehand and make arrangements.

Grievance Redressal Mechanism

It is not uncommon to get frustrated dealing with an institution for getting one’s grievance redressed. Like, for example, banks send an employee at your home at the time of account opening but expect you to go to the bank when you want to close it. Therefore, an investor should enquire about the process for future interactions. This becomes a big hassle especially for senior citizens who may not be tech-savvy enough to be able to use online systems. Therefore, a senior citizen should ensure that a representative of the institution is there for his queries and understand the process for the same.

Hopefully, by now you would be confident to make investment decisions as a senior citizen or for a senior citizen. One last tip before I end. It is always important to do your homework before going to some agent for advice. Many times, agents do not recommend a scheme because their commission from that particular scheme is lower compared to that of the other schemes. Therefore, it is important to not blindly follow a third person. Information is readily available these days. All it needs is your looking for some.

As they say, forewarned is forearmed. And, when you know better, you do better.

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About the Author: Shobhika Puri

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