Mutual Fund Kickstarter

YES!

Are Great For Retirees

Mutual fund investments are subject to market risks, read all scheme related documents carefully.
You like the sound of the ping on your mobile phone informing
when pay gets credited every month. But how can you ensure that
the sweet sound continues even in retirement? You will still need a
regular income to meet your regular expenses. That’s not all.

You also need to meet periodic expenses such as home repairs

and maintenance, besides have lump sum requirements from time
to time, especially during family events like marriages. That’s not
to forget the needs for emergency cash due to possible health
and other emergencies.How will you do all this and not let your
retirement become all about managing money? The answer lies
in investing in debt mutual funds.

By investing in different categories of debt mutual funds and using

their various features, you can ensure that not only do you get
regular retirement income, but also meet periodic expenses, lump
sum requirements, besides meeting emergency needs. Debt funds
can help your money grow well thanks to tax efficiency and
capability to counter inflation. Remember, inflation quietly eats
away the purchasing power of retirement savings.
Here, we will tell you how retirees can smartly use mutual funds.
But before we do that, we will give you a financial big picture of
retirement. This will help you appreciate the utility of debt mutual
funds even better.
Retirement Big Picture
From accumulator to harvester of investments During your
work life, you are an accumulator, investing regularly for retirement.
However, in retirement, these investments need to be harvested to
meet various needs be it for regular income, periodic expenses, lump
sum requirements or emergency funds. It is important to appreciate
this financial transition.

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Balancing money’s easy access with its growth As you
manage your retirement savings, it is important to have relatively
easy access to money parked in investments. This is essential to How Finances Change in Retirement
meet emergencies and sudden expenses. This involves investing in
lower risk, lower return investments that typically provide broadly
stable returns. This helps create regular income. At the same time,
you also need to balance the requirement for money’s easy access Relying on
with its growth. After all, you don’t want to run out of money. investment income
You depend on income
Mutual funds not only help you meet these financial challenges but from retirement
also help you combat four significant financial risks. investments to meet
regular, periodic and
emergency expenses
Financial Risks in Retirement

Investment risks In retirement, most retirees tend to invest in

lower risk investments for stable returns and regular income.
However, these investments can be impacted by risks like Beating inflation Need for liquidity
unfavourable changes in interest rates or default in repayment Savings invested in You need quick access to
retirement needs to grow money for emergencies
of invested money. faster than inflation to with low risk, low return,
secure living standards liquid investments
Outliving retirement savings A monthly budget of Rs 30,000 on
retirement at age 58, will need to double in 15 years i.e. at age 73,
if average inflation rate in the 15 years is 5%. This simply means that
your retirement savings needs to keep growing at a healthy clip so * https://www.incometaxindia.gov.in/
that you don’t run out of money.

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Risks related to money’s easy access You need easy access to
your money, especially for your emergencies. Since this means
typically going for lower risk, lower return investments, there is
always the danger of either having invested too less, or too much,
in these investments. While the dangers of inadequate emergency
funds are obvious, excess liquid investments means retirement
savings can’t grow well.
Tax inefficiency It is of great importance that re-investments of
retirement savings are made in a tax-efficient way so that your
savings can keep growing.
With a brief background on the financial risks to retirement, it is
time to discuss the various investment options and see the edge debt
funds as an option have.
Regular Retirement Income Options
Fixed deposits In India, fixed deposits (FDs) from banks and post
office are quite popular with investors. While FDs provide regular
income from their interest, the income is fully taxable. This can hurt
those in the higher tax slabs. What’s more, the income also gets hit
by inflation. An FD providing annual interest of 7%, effectively
provides 1.9% if the annual inflation rate is 5%. What’s more, any
premature exit from the FD rates typically to lower applicable slab if
you exit before maturity.
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Post Office Monthly Income Scheme (POMIS) This is a five year
regular income investment that is available in the post offices. For an
investment up to a limit of Rs 4.5 lakh for an individual and Rs 9 lakh
for a joint account, you receive monthly income. The monthly income
comes to you thanks to the interest paid out. The interest rates are
revised periodically along with other small savings schemes available
in post offices.
Apart from the limits to the maximum amount of investment and
the lock-in during the tenure, there are significant penalties for
premature exit. Importantly, the interest income is fully taxable. A
drastic revision in interest rates during the tenure means sudden
decline of regular income without recourse to an alternative. These
are significant limitations for those in the highest tax slabs looking to
park their substantial retirement savings.
The other limitations pertain to the fact that being a regular income
investment, the scheme is not appropriate for meeting significant
periodic expenses and expenses requiring lump sum amounts.
Senior Citizens Savings Scheme Over the years, this scheme
has been very popular with the retirees due to its interest rate, which
is typically is higher than alternatives. This is a five year scheme that
can be extended by three years. You can invest upto Rs 15 lakh and
the interest rate gets revised periodically along with other small
savings schemes.
Like POMIS, Senior Citizens Savings Scheme has some
significant limitations. While interest is calculated
annually, it is paid quarterly and the interest income is
Financial Risks in Retirement
fully taxable. You can’t make premature exits from the
investment without paying stiff penalties. The regular
income character of the investment means that it is
unsuitable for meeting certain types of expenses such Investment risks
as large periodic and lump sum expenses.
Regular income needs make people opt for lower risk
investments that are impacted by interest rate, repayment
Life insurance annuities Whether you save money default and other risks
for retirement in a life insurance policy or any other
investment, you can invest in life insurance annuities. Outliving savings
They provide regular income. Annuities can provide With inflation constantly pushing up costs, you could run
monthly income for different periods of time and in out of savings
some cases, even your whole life. There are many
other variants of annuities including those that also pay Liquidity risks
the regular income to spouse and heirs.
You need liquid investments for emergencies. But having them
in excess dents growth required to counter inflation
Whether you save money for retirement in a life
insurance policy or any other investment, you Excessive tax payouts
can invest in life insurance annuities. They provide
regular income. Annuities can provide monthly income Excessive tax payouts from investments impede the growth of
for different periods of time and in some cases, even retirement savings and typically impact living standards
your whole life. There are many other variants of
annuities including those that also pay the regular
https://www.incometaxindia.gov.in/
income to spouse and heirs.

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Regular Retirement Income Options
Fixed deposits (FDs) Post Office Monthly Income Scheme (POMIS)

Available in banks Provides regular 5 year investment Maximum investment:

and post offices for interest income providing monthly Rs 4.5 lakh and
various tenures income, available Rs 9 lakh for
at post offices individual and joint
accounts, respectively

Taxable beyond Lower interest Provides regular but Substantial penalties

Rs 10,000 p.a. payment for fully taxable for premature exit;
with higher limit of premature exit and limited unsuitable to meet
Rs 50,000 for interest income lump sum needs
senior citizens

* http://incometaxindiaefiling.gov.in/home; https://www.indiapost.gov.in/
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Regular Retirement Income Options
Senior Citizens Savings Scheme Life insurance annuities

5 year investment Maximum investment: Provide monthly Option to choose

providing regular Rs 15 lakh income from a income for a period,
income; extendable lump sum of life, and covering
by 3 years retirement savings spouse and children
after demise

TAX TAX

Interest fully Stiff penalties for
taxable and paid premature exits,
every quarter unsuitable for
lump sum expenses
Fully taxable income Very limited
and returns typically emergency access
lower than to money;
alternatives like FDs inappropriate for
lump sum expenses

* http://incometaxindiaefiling.gov.in/home; https://www.indiapost.gov.in/

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How Debt Funds Score Over Others
Liquidity “Will I get access to my money during an emergency?”
This is a question that most retirees ask when they invest their
retirement savings. Thus, easy access to money is key requirement
for most retirees.

Unlike investment options that we have just discussed which have

lock-in periods, in case of emergency, you can liquidate units of
open-end debt funds any time you want. Once you liquidate your
units, the money is credited in the account within 2-3 working days.
Even for close-end debt funds like fixed maturity plans (FMPs) where
you need to stay invested till maturity, you can sell off the units in
stock exchanges in case of emergency.

Tax efficiency Debt funds tend to be more tax efficient than interest
bearing investments. Dividends from debt funds are tax-free in the
hands of the investors. There are tax benefits in case of capital gains
as well. If you remain invested for 3 year or more, the capital gains
are treated as long term capital gains. In such a case, you get twin
tax benefits.
impact in case of interest bearing investment for those in the high-
est tax slab. Of course, for any period less than 3 years, the capital
gains get added to the income and are taxed according to the rele-
vant income tax rate for an investor.

First, you benefit from inflation indexation. This involves
enhancing upwards, the cost of acquired debt fund units, by the
amount of inflation during the period of investment. Effectively, this
reduces the taxable capital gains. You further benefit from a 20%
long term capital gains tax rate. This is much lower than the tax
https://www.incometaxindia.gov.in/
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Combating inflation The inflation indexation benefit for long term
capital gains taxation ensures that you get to retain more of the
growth of your retirement savings. It also ensures that those in the
highest 30% tax slab get to combat inflation far more effectively than
interest bearing investments.
 How Debt Funds Help Retirees
Tax efficiency
Debt fund dividends are tax-free in
the hands of the investors. For 3
years or more, you get inflation
indexation benefits and pay long
term capital gains tax at 20%
Growth of
retirement savings
Debt funds typically provide higher
growth as they exploit interest rate
movements and are more tax efficient
Meet periodic and lump
sum requirements
Close-end debt funds, especially
FMPs, can efficiently meet substantial
periodic and lump sum needs

Easy access
You get money from open-end
debt funds units in 2-3 working
days and sell close-end debt
funds like fixed maturity plans
(FMPs) in stock exchanges
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* https://www.incometaxindia.gov.in/
Combating inflation
The inflation indexation benefit
for long term capital gains
taxation helps counter inflation
Regular income from SWP
and dividends
Debt funds can provide regular
income from dividends and
systematic withdrawal plans (SWP)
Emergency requirements
Investments in ultra-short term debt
funds and liquid funds can help
prepare for emergencies
highest 30% tax slab get to combat inflation far more effectively than
interest bearing investments.
Growth of retirement savings Debt fund investments have the
potential to provide significantly higher returns than fixed income
alternatives. This is because they can take advantage of investment
opportunities and market conditions like interest rate movements.
This advantage gets enhanced after returns get adjusted for taxes
and inflation.
Apart from the advantages that we have just listed, debt funds help
you meet other major financial requirements in retirement.
Regular income from SWP and dividends Debt funds can
provide for regular retirement income not only from the dividends
but also through the facility of systematic withdrawal plan (SWP). It
provides regular income, typically every month, by selling debt fund
units. This is tax efficient as well. The long term capital gains tax of
20% is charged on debt fund units bought more than 3 years ago
with inflation indexation benefits.
Periodic and lump sum requirements Close-end debt funds,
especially fixed maturity plans (FMP), can play a great role in
meeting substantial periodic and lump sum expenses that arise in
retirement. FMPs mature at a pre-determined date like one, three
and five years and have an edge over other alternatives like FDs.
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As FMPs hold debt securities like government securities, corporate
debt and money market instruments till maturity, they provide
broadly stable returns. Added to that are tax benefits that debt
funds get, especially when the debt funds investments are more
than 3 years.
There is also the inflation combating ability. Thanks to the inflation
indexation facility in taxation of long term capital gains, it further
drives home the advantage.
Emergency requirements Future health and other emergen-
cies are often at the back of mind of retirees. Making provisions for
emergencies such as setting aside 3-6 months of monthly expenses,
or more, often helps. However, quick and easy access holds the key.
Investments in ultra-short term debt funds and liquid funds help
retirees meet this need so that they are prepared for emergencies
without compromising on all the other needs.
Clearly, mutual funds can be a financial Swiss knife for retirees, a
multi-functional tool that can help meet various retirement needs. In
retirement, they can not only help get the regular ping on the mobile
on the crediting of regular income but also provide much more.
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