Photo courtesy Andrea Piacquadio.
Fixed-income instruments offer assured returns throughout the investment period. They come with low to moderate risk and people can invest in them in tandem with their life goals. Since the returns are reliable, the fixed income instruments are favorites among retirees many of whom don’t have another source of income besides their savings. Some of the fixed-income investments where a person can consider investing are-
1) Bank Fixed Deposit-
A person can invest in the bank fixed deposit by investing a lump sum amount at an agreed rate of interest for an agreed tenure. These are safe and easy to open. The fixed deposits offer guaranteed returns and even if the interest rates fall you will get the same return on the deposit that you were getting when you opened the account. A person can opt for a monthly, quarterly, annual, or reinvestment option. There are other facilities like a loan against the fixed deposit that a person can get.
In case of an emergency, a person can liquidate the fixed deposit and get the funds. Before investing a person can compare the rates of fixed deposits of various banks, and their credibility, and take an investment decision.
2) Post Office Monthly Income Scheme-
The post office monthly income scheme is a saving plan that provides risk-free returns. The annual rate of interest is 7.1 % which is better than the bank fixed deposit. An individual can invest a minimum of Rs. 1000 and in multiples of Rs. 100 thereof, while the minimum balance requirement is RS. 1000. In a single account the maximum a person can invest is Rs. 4.5 lakh while in a joint amount, the limit is Rs. 9 lakh. The interest is payable monthly from the time of opening of the account; till maturity, and if the monthly payouts are not withdrawn they will not yield any interest. The post office monthly income scheme does not offer any tax rebate under section 80C which means the amount invested in POMIS is not tax – deductible.
3) Senior Citizen Saving Scheme-
Any individual above the age of 60 years can avail of the senior citizen saving scheme. The aim is to provide senior citizens with a regular income after the age of 60 years. The tenure of the senior citizen saving scheme is 5 years but individuals can extend the duration for 3 more years by submitting an application in the prescribed format. Individuals can operate more than one account by themselves or open an account with their spouse.
The minimum amount that can be made in an account is Rs. 1000 and the maximum amount that can be deposited is Rs. 15 lahks. The rate of interest at present in SSSC is 8.0% and the payout is quarterly. There can be premature withdrawal after one year of opening of the account with a penalty. Individuals are eligible for tax deductions under section 80C of the income tax act with investments up to Rs 1.5 lakh.
4) RBI bonds-
RBI bonds are issued by the Reserve Bank of India on behalf of the government of India, so they are very safe to invest in. One can invest in RBI bonds through 12 nationalized banks, 4 private banks, and the stock holding corporation of India. The maturity of these bonds is 7 years with a premature withdrawal attracting a penalty. The minimum investment amount is Rs 1000 and there is no upper limit for investment. At present, the interest rate on the RBI bond is 7.35% with the non-cumulative option where interest is paid every 6 months, while in the cumulative option, the interest is paid on maturity.
5) Annuity plans of Insurance Companies-
The annuity plans enable a person to receive regular payments after investing in a lump sum. The money received by the company is further invested and the investor is paid the returns. These plans are designed to provide a comfortable life after retirement. There are different annuity plans in India and some of them are-
Deferred annuity– The money is invested for some time before the payments are made.
Immediate annuity– In this, the person starts receiving payments as soon as the initial investment is made.
Variable annuity– It is based on the market performance of the insurance company. When the performance is good the returns are on the higher side and vice versa.
Fixed annuity– The plan duration and the amount are fixed for the entire duration of the plan.
The frequency of payouts from the insurance company can be monthly, quarterly, half-yearly, and yearly.
6) Systematic Withdrawal Plan (SWP)-
A systematic withdrawal plan (SWP) is a mutual fund investment plan through which investors can withdraw a fixed amount at regular intervals i.e. monthly, quarterly, or annually from the investment they have made in the mutual fund scheme. The amount invested in the units varies according to the market volatility, but if kept for a long term it will appreciate.
A systematic withdrawal plan generates income by redeeming units from the scheme at predetermined intervals. The investor has to choose the amount, payout frequency, and dates according to their requirements. If the SWP withdrawal rate is lower than the returns generated by the fund the investor gets capital appreciation in the long term. The SWP can be stopped at any time by the investor. Returns on SWP are tax efficient and there is no TDS, unlike other investment options.
If a person is retired they should consult a financial advisor to invest the retirement corpus and after assessing the financial situation they can decide to invest in SWP. If you don’t have a regular income you can have a fixed income by investing in a senior citizen saving scheme and post office monthly income scheme. Once you have a regular income you can invest the remaining amount in the systematic withdrawal plan. The investment should be made in hybrid mutual funds.
A regular income can be generated with the investment options discussed above. Every option has its own benefits and a person can choose according to their requirements. The fixed and regular income generated would be useful for persons who don’t have full-time jobs and retired persons.