MUMBAI, Maharashtra / The Economic Times / Sunday Features / Financial Times / April 25, 2010
By Srikala Bhashyam, ET Bureau
If the young need products to build wealth, the elders need options that can protect their corpus and yield returns at the same time. The moment you use the word protection, it automatically amounts to less risk.
It is not surprising that investors who have retired from employment are less willing to take risks. But the increasing cost of living has pushed the senior citizens too to take some risk in search of higher returns.
Photo for illustration purpose only
Before even thinking of an investment option for the corpus, retired professionals need to keep a few factors in mind. Even among the senior citizens, the category can be two. In early days of retirement life, for those with pension income, the dependence on monthly income from the corpus would be lower. These investors can afford to go for slightly risky options such as monthly income plans of mutual funds which have a small allocation to equity. Though they don't offer guaranteed returns, they compensate by offering the prospect of capital appreciation over a period of 3-5 years. If an investor has sufficient pension income in the pipeline which is generally the case in the early years of retirement life, he can afford to allocate in this product. Those with additional surplus can even set aside money in balanced funds or large-cap focused equity funds, but should not allocate beyond 20 percent. On the other hand, for those who have spent close to a decade without employment, the ability to take risk will be limited and hence, products which determine the rate of return would be ideal options. The senior citizen scheme with nine percent return, fixed deposit of banks or triple A rated bonds would be the options. Since interest income is taxable revenue, even senior citizens have to worry about the concept of tax while choosing a product. One of the options to lower tax liability is to use nonworking spouse as an investor by investing a portion of the corpus in his/her name. While doing so, one needs track the overall income level of the spouse. The good news is that the government has been generous with this category of tax payers as they always enjoy a higher slab for non-tax category. While these options are traditional and well-known, a few new products have emerged in recent times.
Reverse mortgage is one such option which is still in its infancy.
The product allows a property owner to earn income without the hassles of repayment, unlike pledge. Very few banks are offering the option which is also the reason for the lack of popularity of the option. Immediate annuity is another option that can be considered by those who have a slightly large corpus. A handful of insurance companies offer the product which is more like a single premium pension plan but as the name indicates, allows the investor to draw pension immediately. The case in favour of this product is its longevity and the fact that an investor need not worry about the changing economic environment. [rc]
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