Post retirement, the need for a regular income stream becomes vital. Even if you are a pensioner, it is likely that you need to supplement it with some regular cash flow to meet your expenses. That is why it becomes imperative for you to build a portfolio of investments that generate income either monthly or quarterly. Here are a few options, with varying degrees of risk, available to you.
Post office schemes
The top choices in terms of capital safety as well as regular income are the post office senior citizen savings scheme and post office monthly income account scheme. Currently the post office senior citizen scheme (five-year tenure) offers 9.3 per cent per annum, with interests paid out every quarter. This is higher than the interest rate of 9 per cent offered by a good number of banks.
What more, the principal investment is available for deduction under Section 80C of the Income Tax Act, up to Rs 1 lakh. Hence, besides attractive interest rates, the scheme is also suitable for those who are in the middle or higher tax bracket and need to reduce their tax outgo. You can invest up to Rs 15 lakh under this scheme.
The post office monthly income scheme has a less attractive 8.5 per cent per annum. Its key advantage is the monthly pay out. While you can opt for this if you are averse to non-government schemes, it may be a better option to go for senior citizen scheme first. The interest from the senior citizen scheme will be credited the post office savings account. Hence, you can also withdraw money as and when you wish to, after the quarter’s interest is credited.
Interest though is taxable under both the schemes. Tax is deducted at source if interest exceeds Rs 10,000 per annum. Ensure that you submit Form 15H if your annual income is well below the minimum tax slab.
Banks and financial institutions
Many banks and financial institutions offer monthly interest payout. But the interest rate mentioned as the annual rate will be accordingly discounted. For example, if you had an interest payout of say 9.35 per cent a year for quarterly payouts, the monthly interest rate applicable could be say 9.3 per cent a year.
Currently, Karnataka Bank, IDBI Bank, Yes Bank, to name a few, offer interest rates higher than the Post Office Senior Citizen Scheme. But if you avail the 80C tax deduction benefit available in post office senior citizen scheme, then your yield would be higher than the rates offered by banks. Do note that interest income is taxable in these cases too.
Bank deposits are relatively safe as your deposits (plus your savings account balance) are insured up to Rs 1 lakh in each branch of a bank.
Among finance institutions, you should be careful about the credit worthiness of the company. Therefore, always check for their credit rating and go for those with highest credit rating of AAA. HDFC’s Platinum deposit, for instance, offers 9.3 per cent annual rate for monthly interest payout option and 9.35 per cent for quarterly payout options. It has AAA-rating.
If you are not confident about investing in private institutions, then look for government-backed ones. Currently, National Housing Bank, a wholly owned subsidiary of RBI offers 9.85 per cent a year across various maturity periods. But the interest payout is only on a half-yearly basis.
If you have limited- or no-source of regular income, you will do well to allocate a chunk of your savings in safe options. But if you have other sources of cash flow like pension or rental income, then a fifth or less can be parked in savvier options like debt mutual funds. We are not suggesting the universe of equity funds for reasons of high risk.
Mutual fund investors may be aware of Monthly Income Plans or MIPs that seek to offer a monthly/quarterly/half-yearly dividend payout to investors. These funds predominantly invest in short and long term fixed income instruments issued by government or corporate, in debentures and in commercial paper. MIPs however, have a 15-20 per cent exposure to equities to provide some kicker to returns.
The flip side here is that while most schemes strive to declare dividends every month, there is no guaranteed payout. The quantum can also vary based on the gains made in various interest rate cycles. Also, debt funds suffer a 13.5 per cent (including cess and surcharge) dividend distribution tax DDT). Although paid by the fund, this is adjusted in the NAV.
If you wish to avoid the uncertainty in dividend payment and the NAV erosion from DDT, then systematic withdrawal plan (SWP) is a good option. You can invest a lump sum in a short-to-medium-term debt fund or MIP. Avoid the dividend option in this case. Allow the lump sum to grow for at least 1-3 years. This will also help avoid short-term capital gains tax (mf investments less than one year suffer short-term gains taxed at your income tax slab rate) and exit load.
Opt for SWP which will allow you to withdraw a fixed amount systematically, on a monthly, quarterly or half-yearly basis. But you will suffer long-term capital gains at the time of withdrawal. That will be 10 per cent on the gains without indexation or 20 per cent with indexation. Hence, if you are among those in the high tax bracket, this would be a superior option to the traditional fixed income options.
As far as possible, have a judicious mix of the above options in line with your risk appetite.
Happy investing and have a safe 2013!
Note: Products recommended in this article are general suggestions. Investors would have to keep in mind their specific requirements and risk appetite before choosing their investments.
Author: Vidya Bala, Head, Mutual Fund Research, FundsIndia