These are tough times for senior citizens living off their debt investments. The interest rates on traditional fixed-income instruments have been coming down for some time now, while debt funds have been facing defaults and rating downgrades crisis for months. The recent Franklin Templeton Mutual Fund fiasco further shook up their confidence.
Now, State Bank of India (SBI) has lowered interest rates on fixed deposits (FD) by 20 basis points (bps) for tenures less than three years and has increased rates by 30 basis points (bps) for long-term FDs but with conditions. One bps is one-hundredth of a percentage point.
Interest rates on FDs of one year but less than three years are now at 6% per annum compared to 6.2% earlier for seniors. SBI offers 50 bps higher rates for seniors compared to regular depositors. For a non-senior retail depositor, the rate for the same tenures is 5.5% or 50 bps lower.
In case of tenures above five years and up to 10 years, the interest rates have been revised upwards. Seniors can get rates of 6.5% per annum. The regular depositor gets 5.7% or 80 bps lower. A senior gets a 30 bps premium, over and above 50 bps, in this case. If a senior withdraws the FD pre-maturely, the additional 30 bps premium will not be payable.
But apart from bank FDs, senior citizens can consider other options too. “There are other low-risk alternatives that seniors can look at. For example, they can look at the RBI bonds that offer an interest rate of 7.75% per annum," said Deepesh Raghaw, founder, PersonalFinancePlan.
For long-term investments, seniors can also look at the Senior Citizens Savings Scheme (SCSS) that offers 7.4%. While the RBI bonds have no limits, SCSS has a ceiling of Rs15 lakh. For a senior couple, it would be Rs30 lakh. Long-tenure post office FDs also offer better rates than SBI––6.7% per annum for a five-year tenure. But do remember that if an individual closes post office FDs with a tenure between 6 months and 12 months from the date of opening, the depositor will get only 4% interest.
For the short term, seniors can look at FDs of high-rated non-banking financial companies (NBFCs) like HDFC Ltd, which offer up to 7.55% per annum. Even some mid-size private sector banks such as DCB Bank and IDFC First Bank can offer similar or slightly higher returns, depending on the tenure. If seniors opt for deposits of small finance banks, financial planners say, they should restrict the tenure to one or two years.
Seniors need to remember that long-term, low-risk investments may not be liquid. They should, therefore, divide their investments among short-, medium- and long-term investments, depending on their cash flow requirement.