Mar 15, 2008

Investments- Senior Citizens and Investments

Senior Citizens and Investments 

Like most budgets, this years' too had some minor measures that haven't attracted too much attention but are nonetheless interesting. One such measure has been the inclusion of the Senior Citizens Savings Scheme (SCSS) into Section 80C. Why is this interesting? Because it offers a significant new tax break to older people who still have an income but are short of options on saving taxes. Let me explain. The SCSS was introduced in 2004 budget. It is a deposit with the government that is serviced through the post office and is available only to those who are older than 60 years, or 55 years for those who have taken a VRS. The deposit fetches interest at the rate of nine per cent, which is a great return for a safe, government-guaranteed investment. Until now, this deposit had no tax-saving angle to it. Money put into it did not get the depositor any kind of a tax break and the interest earned was fully taxable. Mr. Chidambaram has changed this in this budget. Now, investments made in the SCSS get deducted from the investor's taxable income under Section 80C. Of course, this is a part of the overall limit of Rs 1 lakh that all section 80C investments must fit into. However, some of the options that normally make up younger taxpayers' 80C investment basket are either unavailable (like PF) to many older ones or are considered too risky (like equity ELSS funds) for them. Any senior citizen who is still working, or receiving income from a business or investments would want to fully utilise the 80C tax break. Given the much higher tax exemption (Rs 2.2 lakh) that the finance minister announced in the budget, the tax burden for low- and middle-income seniors is now very manageable indeed.

However, this brings to my mind to what I believe is a common flaw in the way we generally think of senior citizens' investment needs. It seems to be a matter of deep belief that equity is too risky for older people and their investment needs must be met by fixed income alone. This, I believe is a mistake. The risk in equity is a function of time. The longer your period of investment, the lower the risk from equity. Of course by equity I mean equity mutual funds with a good track record and not punting on 'tips'. Over long periods in excess of ten or fifteen years, the risk from sensible equity investments is practically negligible and the benefit of big returns is enormous. A sixty-year old senior actually has a very long investment horizon of twenty or thirty years. As a matter of fact, not investing anything in equity-based instruments leaves seniors exposed to a different and more insidious risk-that of inflation. Remember, unlike a youngster who will probably earn more as the years go by, a retired senior is entirely dependent on investment income. Fixed income instruments, whether fixed deposits or debt mutual funds or post office schemes rarely deliver more than one or two per cent above the inflation rate. Remember that your real personal inflation rate is likely to be higher than the official one, specially when you take into account increasing medical expenses. When you think carefully, you will realise that not investing anything in equity leaves seniors exposed to the real risk of becoming poorer as the years go by. I'm not saying that a senior should invest primarily in equity. The right approach would be to try and estimate the actual spending requirements over the next seven to ten years and keep that in fixed income instruments. The remaining amount is your long-term holding and there's every reason to put around half of that in equity. This is probably best done by splitting that amount between two or three balanced funds.

Remember, over a genuinely long-term, equity offers an extremely good risk-to-reward trade-off and there is no reason for seniors not to take advantage of it.