Suitable Debt Portfolio for Retirement Corpus

Financial planning experts recommend retirees to have some allocation to equities, as opposed to 100% allocation to debt. While risk is an important consideration for retirees, with retired lives getting increasingly longer, equity over a sufficiently long time horizon, can not only beat inflation but also grow your retirement corpus. As such 70 - 80% debt and 20 - 30% equity is a suitable asset allocation for new retirees. Over time, you can reduce your exposure to equity and increase your debt allocation.

Traditional retirement savings options like Post Office MIS, Bank Fixed Deposits etc pay interest of 8 to 9% and it is not tax friendly. However, mutual funds offer excellent investment solutions to retirees.

Monthly income plans of mutual funds are excellent investment options for retirees. These plans usually invest around 80% in debt and 20% in equities. While the debt portion ensures degree of capital safety and regular income, the equity portion gives a kicker to the returns. Monthly income plans like Birla Sun Life MIP 25, ICICI Prudential MIP 25, Reliance MIP, UTI MIS Advantage etc have good track record of strong performance. Over a long term these funds have give 11 – 12% returns. The monthly dividend option of these funds also have an excellent track record of paying regular dividends. Please note that monthly income plans are debt funds and as such withdrawals (excluding dividends) before 36 months will be subject to short term capital gains. In other words, the gain on the units redeemed before 36 months will be added to your income and taxed as per your income tax rate. Withdrawals after 36 months will be subject to long term capital gains tax of 20% with indexation benefits.

If you want to avoid debt fund taxation, you can consider investing a small portion of your corpus in moderate risk equity oriented hybrid funds like ICICI Prudential Balanced Advantage Fund, Reliance Equity Savings Fund etc. These funds invest around 30% - 35% in equity, 30 – 35% in derivatives for arbitrage opportunities and 30 – 35% in debt. The derivatives portion ensures equity taxation while balancing the risk of your investment. These funds have given nearly 15% annual returns in the last 5 years. Some funds pay regular monthly dividends too. Since these funds are equity funds, all withdrawals after 12 months of investment is tax free.

For short term investments (less than 3 years) you can consider credit opportunities funds. These are purely debt funds and invest in corporate bonds of high credit quality. The funds have very little risk and have given double digit returns as well, e.g. Birla Sun Life Short Term Opportunities, Franklin India ST Income Fund, ICICI Prudential Corporate Bond Fund, HDFC Short Term Plan etc.

Senior citizen savings scheme is also a very good investment option for retirees. You can invest in this scheme through your bank or through your post office. The scheme is eligible for 80C tax savings. The interest rate on this investment is 9.2%, payable on a quarterly basis. Please note that the interest is taxable. You can invest up to Rs 15 lakhs in senior citizens savings schemes. The maturity of the scheme is 5 years, extendable by another 3 years. Premature withdrawals are allowed.