Senior Citizens Saving Scheme (SCSS) vs Mutual Funds for post-retirement investment.

Senior Citizens Saving Scheme – SCSS vs Mutual Funds for post-retirement investment.

You will learn-

Importance of post-retirement investment

Options available for post-retirement investment

  • Senior Citizens Saving Scheme (SCSS)
  • Mutual Funds:
  1. Debt Mutual Funds
  2. Equity Mutual Funds

SCSS vs Mutual Funds: Our Recommendation

Importance of post-retirement investment

After retirement, your active income (i.e. salary from work) ceases. You depend on passive income to meet your ever-rising expenses. At 10% inflation, if your expenses are Rs. 5 lakhs per annum today then after 10 years & 20 years, they will be at Rs. 13 lakhs & Rs. 34 lakhs per annum respectively. This doesn’t include healthcare costs and the vacations. You also face ‘longevity risk’ which means you will need your savings to last longer than planned. So, you need to ensure that you maximize returns from your savings through post-retirement investment.

Options available for post-retirement investment

Senior Citizen Saving Scheme (SCSS) and Mutual Funds are two widely accepted options for post-retirement investment. Each has his own merits. Three aspects to consider while choosing the suitable combination are-

  • Liquidity- to redeem your investments at the time of emergency,
  • Effective rate of return after tax- to fight inflation and,
  • Safety- since you don’t have active income

Let us cover each of these options to make an informed decision.

1) Senior Citizens Saving Scheme (SCSS)

SCSS is like FD. It is offered by the Government and has a fixed interest rate against principal with a maturity of 5 years. You can get an SCSS from your bank or from the post office.
The feature of SCSS are-

  • Safe- Since Government guarantees it
  • Low Liquidity- SCSS once started cannot be redeemed for one year.
  • Premature-Withdrawal charges apply- 1.5% & 1% after 1 year and 2 years respectively.
  • As on July 1, 2017, the interest rate applicable is 8.3% but interest income is not tax free. Tax rate is determined by applicable tax slab based on total income.
  • The interest is credited to you every 3 months
  •  Multiple schemes can be taken. However, maximum limit of 15 lakhs combined for all schemes is applicable.

2) Mutual Funds

Mutual funds allow individual investors to pool their money to invest in stocks and bonds. They are professionally managed by experts and are diversified and hence, less risky compared to directly investing in stocks and bonds. Mutual funds are liquid, and investors can redeem their money anytime they wish. You can invest in mutual fund using lump sum or Systematic Investment Plan (SIP) approach.
To know more about mutual funds, please read our earlier post on how mutual funds work? The return and safety of mutual depends on nature of investments contained in the mutual fund.

Let us learn more about the types of mutual funds and their benefits-

a) Debt Mutual Funds

Debt mutual funds invest primarily in bonds issued by companies and government. You can think of it as you are giving loan to bond issuers. The returns are more predictable and hence debt mutual funds are less risky.

There are different types of debt mutual funds namely liquid funds, ultra short term funds, short term funds, income funds, dynamic bonds, fixed maturity debt plans and credit opportunities funds. They differ in terms of riskiness, maturity and yields (returns). Depending on your time horizon, return required and risk appetite; you can choose the right mix.
The features of debt mutual funds are-

  • Liquid- You can redeem from debt mutual funds anytime.
  • Potentially Higher effective rate of return after tax compared to SCSS
  • Different kind of debt funds available to suit different risk tolerance
  • Dividend paying debt funds can be selected for regular income
b)  Equity Mutual Funds

Equity mutual funds invest primarily in stocks of publicly traded companies. You can think of it as giving money for share of future profits of the company. They hold potential to offer much higher returns but are unpredictable and hence equity mutual funds are riskiest when compared to SCSS & Debt funds.

There are different types of equity mutual funds namely large cap funds, mid cap funds, small cap funds, sector-specific funds and theme-based funds. They differ in terms of riskiness, focus and return potential. Depending on return required and risk appetite, you can choose to invest with a long-term horizon.
The features of equity mutual funds are-

  • Liquid- You can redeem equity mutual funds any time
  • High rate of return in the long term. If chosen wisely, equity funds can give inflation beating returns. Over 1-year capital gains in equity funds is tax free and <1 year capital gains are taxed at 15%.
  • Equity funds are volatile, hence should be invested in for 5 years or more.

You can learn in more detail about types of mutual funds.

SCSS vs Mutual Funds: Our Recommendation

As pointed out at the start, you must make post retirement investments to fight inflation while minimizing risk to meet your ever-rising expenses. Senior Citizen Saving Scheme (SCSS) guarantees a certain return on your savings but is illiquid for short term needs and falls short in fighting inflation in the long-term. A combination of debt and equity mutual funds will serve you best to meet the requirements of liquidity for near-term expenses and emergency funds as well as of inflation beating returns to counter ‘longevity risk’.

You should-

  • First estimate your yearly expenses by considering at least 20-25 years of post retirement life.
  • Divide your post retirement period requirements into different horizons. For example, Immediate, short term, medium term and long term.
  • Put the immediate expenses and provisions for emergency in liquid mutual funds. For example, place next 3-6 months of expenses in liquid debt funds which offer much better returns than placing that money in savings bank account while being immediately redeemable.
  • Invest the savings that you will need at least after 5 years in a combination of equity mutual funds. The equity funds will help you attain inflation beating returns thereby securing a good retirement lifestyle.

A combination of debt & equity mutual funds can give you far better returns and grow your wealth in ways that can’t be done with the SCSS scheme.

 

SCSS vs Mutual Funds

Visit our website to know more about WealthTrust. Do read our blogs on Mutual funds.

2 Comments on “Senior Citizens Saving Scheme (SCSS) vs Mutual Funds for post-retirement investment.”

  1. I am a retired pvt engg company employee and I ahve kept around 60 %in mutua fund and 15 % in SCSS and balance in LIC and Fd.

    Please suggest should I keep more in LIC Jiban akhshoy or in Debt funds

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