Interest rates in India were on a steady decline for the last few years and the demonetization of 500 and 1000 rupee notes has just accelerated the process. Many banks like ICICI Bank, HDFC Bank, Canara bank have announced a rate cut (ranging from 10 bps -0.10 % to 50 bps -0.50 % depending upon the tenure of the fixed deposit) with immediate effect, all other banks too will follow suit soon. Even AA+ rated companies like Mahindra and Mahindra Finance, Dewan Housing Finance, Shriram Transport Finance have cut their deposit rates.
This was long overdue; as India is one of the very few developing economies with such high interest rates and sooner or later they would have had to align with the global rates and lower interest rates will also stimulate economic growth. While all this is theoretically logical, fixed income investors especially retirees who are dependent on the interest for their regular expenses now face a practical problem – where to invest so as to get a reasonable amount of fixed income assuming low risk on principal? India does not have a social security system like the developed countries do which makes it all the more important to explore alternate low risk investment options .
- Company fixed deposits – Though they have higher interest rates varying from 50 bps to 200/300 bps higher than standard bank deposits, people are not comfortable putting in their money as the general perception is that it is risky as they are unsecured. True, they are riskier than bank fixed deposits, but AA+ rated plus deposits rate high on safety and can be considered. Moreover, there is no guarantee than banks cannot go bust. And DICGC – The deposit Insurance and credit guarantee corporation guarantees only up to 1 lakh bank deposit per client, so anything above that is unsecured.
- Senior Citizen’s Savings Scheme (SCSS) is one of the most attractive options for the retired. Up to 15 Lakhs per account above age 60, and the current interest rate is 8.6 % pa fully taxable for the financial year 2016-2017. The tenure is 5 years and the scheme carries the highest safety.
- Tax free Bonds – These too carry sovereign risk- highest safety. The coupon rate is usually lower than that of fixed deposits, but for those in the highest tax bracket, the effective returns is higher than the post -tax returns of the taxable fixed deposits. The main disadvantage is the high lock in period – 10/15/20 years. These bonds are trade able in the secondary market; but how soon it can be liquidated in case of emergency depends on the trading frequency and volume. Another disadvantage is that they offer only annual interest under the non -cumulative option hence may not suit those who are looking for regular income. There are very few new issues coming out in the market, but one can always buy the existing ones being traded at the ongoing bond prices.
- Debt schemes of mutual funds – These don’t guarantee a fixed return, but score over fixed deposits in terms of tax efficiency for those taxed at the highest slab. These are liquid, can be withdrawn anytime and have monthly, quarterly and half yearly dividend payout options too, but the amount of dividend paid is variable, not a regular fixed amount.
- Government of India 8 % taxable bonds – These bonds were not a favorite till recently, since long term fixed deposits paid more than this, and with the interest being taxable like FD interest, there was no clear advantage of investing in these. But now with the fixed deposit rates having reduced drastically, one could consider this. But only half yearly option is available in non-cumulative category which may not suit those wanting regular monthly income.
- Post office Monthly Income Option – This is an evergreen product suitable to senior citizens with low risk appetite. The interest is payable monthly and the current rate is 7.7 % pa , and one can invest up to 4.5 lakhs in single name and up to 9 lakhs jointly. The tenure is 6 years (premature withdrawal facility is available after one year with some deductions). This product has an attractive feature – a bonus of 5 % on the principal which is paid if the deposit is held till maturity, i.e 6 years. The disadvantage of this product is that it is fully taxable, making the returns almost comparable to fixed deposits, which is why it is the last one on the list.