The investment needs of senior citizen investors are different from others. The retired are often advised a low-risk investment strategy because they may struggle to recover from a market-linked setback. Hence the preference for fixed deposits (FDs) among senior citizens.
FDs allow several benefits such as anytime liquidation, any-size investment, assured returns, and also act as a collateral where loans are required.
As things stand today, inflation has spiked and interest rates are poised to rise. So, what should be the right strategy for senior citizen investors?
Avoid FDs For Longer Tenures
Senior citizens may avoid infusions into long-term FDs. A short duration FD that will mature in the near term can be renewed to exploit rising rates. Locking into a more prolonged duration would prevent senior citizens from benefitting from this unless they want to bear the interest rate penalty.
Select Your Bank Smartly
Interest rates vary from one bank to another. Large banks, considered safer, give you the lowest rates. But small banks, considered riskier in comparison, provide higher rates. Consider your risks and rewards and split your deposits between different banks for better average returns. While depositing with a smaller bank, you have the cushion of the Rs 5 lakh deposit insurance provided by RBI, just in case the bank goes under. When depositing with a small bank, sticking to this limit may be ideal. However, you could always go higher basis an assessment of the bank’s stability.
Prefer FD Laddering
If you have a single large deposit, consider splitting it into multiple deposits of different tenures. The varying maturities may improve your average returns, provide you liquidity at various life stages, and give you the option of renewing the deposit for higher rates. For example, if you have a single deposit of Rs 10 lakh, break it into five deposits, i.e., Rs 2 lakh each, and deposit for various durations such as one year, two years, three years, and so on. After each maturity, you can use the proceeds or reinvest them for higher returns. FD laddering can also be done via multiple banks offering higher average returns instead of a single bank.
Switch Your Lower Interest Rate FDs
If you already have low-rate FDs, wait for the interest rate to go up before switching. The interest penalty for premature withdrawal needs to be less than the interest you gain by renewing for higher rates. For example, if you exit your current FD, which pays 5% per annum, you may have to pay a penalty of 0.5%, and your effective rate reduces to 4.5%. However, if new FDs are offered at 6% pa interest, you’ll benefit despite the penalty.
Senior citizen investors can claim tax deductions up to Rs 50,000 in a financial year against interest income from FDs. So, the chances of increasing interest rates can be a good opportunity for them to get higher returns.
(The author is CEO, BankBazaar.com)
