This article discusses various options for investors looking at investing in a post-retirement portfolio in 2023.
What are the best options to invest post retirement in 2023 in India?
Posted on 09 Apr 2023
Author: Sayan Sircar
10 mins read
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This article discusses various options for investors looking at investing in a post-retirement portfolio in 2023.
📚 Topics covered:
- How to invest during retirement?
- Bucket 1: Cash assets
- Bucket 2: Income assets
- Bucket 3: Risky assets
- A note on taxation
How to invest during retirement?
For investors deciding on how to create a post-retirement portfolio, we will create a very simple portfolio that is easy to manage and is expected to meet both the inflation and longevity risks by creating three buckets of assets:
- Bucket 1: Lowest risk / Cash - The purpose of this bucket will be to hold living expenses for the next five years
- Bucket 2: Medium risk / Income assets - The purpose of this bucket is to hold assets that generate income. Income from this bucket will be used for day-to-day expenses
- Bucket 3: Highest risk / Growth assets - This bucket will have everything that is not there in buckets 1 and 2 above. This bucket exists to provide growth that beats inflation over time
In each of the bucket descriptions, the risk labeling refer to market or price-fluctuation risk. There are other risks as well like credit, interest and liquidity that also needs to be understood and planned carefully.
Read more here: How to plan for retirement using the bucket approach?
This post will list down some common options for investing for each of the above bucketsJoin the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.
Bucket 1: Cash assets
Fixed / Recurring deposits
While bank deposits give you predictable returns, there are two things you need to keep in mind
- these are taxed at the highest tax slab of the investor. Many people try to circumvent this problem by investing in the name of senior citizens in the family who are in lower tax brackets. However, income clubbing rules may apply, or the senior citizen will also end up paying tax. Generally, FDs in the name of senior citizens have a slightly higher interest rate
- while all banks have a ₹ five lakhs DICGC guarantee for bank failure, this should not be the criteria in choosing a bank since there is a defined limit in getting this ₹ five lakhs in case the bank fails. RBI defines SBI/ICICI/HDFC as too-big-to-fail or Systematically Important (SIFI), and investors should stick to them during retirement.
This post discusses FD vs mutual funds in more detail.
These funds try to profit from pricing discrepancies in the equity cash and futures markets. They have equity-like taxation (10% tax over 1 lakh of LTCG). There are two things that investors need to keep in mind
- short term returns can fluctuate a lot depending on the arbitrage opportunities in the market. You should check this before investing
- SEBI allows 35% of the fund portfolio in debt instruments which require usual debt fund due diligence
Annuities / pension plans
Pensions offer a fixed payment throughout the life of the investor with a few caveats
- the returns are taxable in most cases
- the payouts are fixed and do not beat inflation (there is a product offering 3% increment yearly, but the starting yield is lower)
- you do not get the money back ever in case you change your mind
- there are two options: higher payouts today by choosing not to get any money back on death or slightly lower payouts now to ensure the nominee gets the investment amount back on death
This concept is covered in more detail in this article.
Bucket 2: Income assets
Real estate is an eternally favourite investment option for Indian investors. When purchased right, both rent increase and capital appreciation are possible. Rental income will supplement interest income. There is a caveat that an excess allocation to real estate may lead to an asset-rich-cash-poor situation that needs to be handled carefully.
Small savings schemes
Small savings schemes include post office deposits, Monthly Income Account Scheme (MIS), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Public Provident Fund (PPF) scheme, Kisan Vikas Patra (KVP), and Sukanya Samriddhi Account (SSA) Scheme.
Rates updated on 04-Oct-2023
|Instrument||Rates of interest from 01-Oct-2023 to 31-Dec-2023|
|1 Year Time Deposit||6.9%|
|2 Year Time Deposit||7.0%|
|3 Year Time Deposit||7.0%|
|5 Year Time Deposit||7.5%|
|5 Year Recurring Deposit||6.7%|
|Senior Citizen Savings Scheme (SCSS)||8.2%|
|Monthly Income Account Scheme (MIS)||7.4%|
|National Savings Certificate (NSC)||7.7%|
|Public Provident Fund (PPF) scheme||7.1%|
|Kisan Vikas Patra (KVP)||7.5% (will mature in 115 months)|
|Sukanya Samriddhi Account (SSA) Scheme||8.2%|
All of these small schemes are not suitable for a post-retirement portfolio, like Sukanya Samridhhi which is for a girl-child-related goal, but the rest may be used.
Debt mutual funds
As discussed in this post, we choose mutual funds using these criteria:
- Category of fund: overnight, liquid, ultra-short, low duration or money market funds only with Macaulay duration <= one year (alternatively modified duration <= one year)
- Credit quality of portfolio: mix of SOV/AAA/A1+/Cash only
- Gilt funds can be considered if you can understand what drives NAVs and how to profit from the volatility. Recent returns of debt funds do not predict future returns in any way.
These funds will be used instead of FD in bucket 2 due to the tax efficiency of debt funds over FD.
Target maturity debt funds
This is a recent offering in the debt mutual fund space that “mature” like an FD on a particular date but allow new investments via lump sum and SIP (or exits) anytime before maturity. These funds typically have the maturity year in their name and invest in RBI / Government bonds or bonds issued by state governments and generally do not have a default, i.e. credit risk. These funds hold the bonds until maturity (chosen to be the same time as the fund maturity) and offer a roll-down holding strategy. Investors need to keep in mind that:
- The goal horizon should be just after the maturity date and not more than a few months away for better tax efficiency and lower reinvestment risk
- Low liquidity of the underlying bonds can impact returns in case there are significant in or outflows in the fund
- each investment in the fund is expected to get the yield to maturity (YTM) since the bonds are held to maturity though that may not always be true due to the above point
- any premature exits will have unpredictable returns, including losses since the fund NAV can be volatile (due to interest rate risk) if the maturity date is far away
Read more on this topic here: Who should invest in target maturity debt funds?
RBI / Government Bonds
This is a new facility via the NSE goBID platform or the new RBI retail direct scheme where retail investors can directly buy RBI, i.e. government bonds for up to two crores. This allows sovereign guaranteed coupon payments every six months and gets the principal, i.e. face value of the bond, back after maturity. This replicates a pension plan with the option of getting a part of the bond purchase amount on maturity.
Investors should know that:
- it is difficult to exit this investment since there is only a minimal secondary market for these bonds (depending on which platform you purchase them from)
- the interest payments are taxable at slab rates and are not inflation-indexed. Investors in the pre-retirement phase should reconsider investing in these bonds since a part of their investment is lost to tax
- bonds can be both short or long-dated (10-40 years or more) and should be matched with the goal duration or the duration for which income is needed
- when buying the bond, you will most likely pay a price higher than the face value of the bond, but unlike annuity plans, there is no 18% GST
This same discussion applies to RBI Floating rate bonds as well, which mature after seven years.
Bucket 3: Risky assets
Non convertible debentures
NCDs are very attractive to yield-chasing investors, given offers as high as 10% (as of July 2021), which doubles the investment in around seven years. There is no free lunch. However, to offer such high returns, these NCDs have AA or similarly low credit rating with a higher risk of default than lower-yielding AAA-rated investments. Only investors with an extremely high risk-taking ability (not risk-taking willingness) should choose such NCDs with the understanding that an NCD default (like DHFL) should not derail their retirement. The proceeds are taxable at the marginal tax rate on maturity.
Dividends from stocks
Investing in dividend-paying stocks is a common strategy for generating income in retirement. Dividends offer a reasonably stable income stream and can be considered by understanding the impact of adding such stocks to the retirement portfolio. Due to taxation at the marginal rate, dividend-paying stocks should be a part of the portfolio only during the withdrawal phase.
Stocks via mutual funds
Stocks have historically beaten inflation in most global markets and in India. Exposure to stocks is very easy to get via mutual funds. Investing in mutual funds offers certain benefits that other options may or may not have: professional management, tax efficiency, small ticket sizes and the chance of beating inflation.
A note on taxation
As on April 2023, fresh investments in non-equity mutual funds, like debt and international funds, are taxable at slab rates of the investors. This tax rule brings debt mutual fund taxation on par with interest income sources like bonds, NCDs, FDs and rent.
The allocation to both interest-bearing investments and debt mutual funds has to be made in a way to optimize tax payable by the retiree and their family members.
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Topics you will like:Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (14) Choosing Investments (40) FAQ (7) FIRE (13) Gold (14) Health Insurance (4) House Purchase (21) Insurance (15) International Investing (10) Life Stages (2) Loans (13) Market Movements (17) Mutual Funds (34) NPS (6) NRI (15) News (10) Pension (8) Portfolio Construction (47) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (38) Review (13) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (15) Tax (43)
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This post titled What are the best options to invest post retirement in 2023 in India? first appeared on 09 Apr 2023 at https://arthgyaan.com
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