Retirement blues

In view of the interest rates that are set to fall, stock-related mutual funds score over interest-bearing fixed deposits

A rate cut by the banking regulator always brings wider smile on the faces of those who run in debt; unfortunately, for those who maintain money in cash, it leaves a nightmare.

Especially, those who are approaching 60s or over, who have planned for their retirement and depend on the income from interest for their day-to-day requirement are the ones that suffer most. In a way, we (the country as a whole) and the youth-focused media totally ignored this class of people.

For quite a many years, the government and industry are pushing the Reserve Bank to cut interest rates in lieu of ease of doing businesses and growth targets.

Now that the time has come for interest rate cut, RBI governor Raghuram Rajan has started hitting the ball. The banks started cutting base interest rates with a rider that the deposit rates should lead, prompting the government to think of reducing interest rates on all its saving schemes including provident funds.

Generally, retired persons are inclined to keep a good portion of funds in risk-free cash-related investments, like fixed deposits. They need finances for unexpected expenses and only cash can fill such needs. With the rate cut fears increasing and as the cash-investments may offer low cash returns, self-funded retired people, in particular, are now looking for other options.

It is clear that income from interest may not be a trusted source for the retiring persons. In such a scenario, those who are planning ahead of their retirement need to look for risk bearing investments, such as mix of stock and bonds or cash funds. Traditionally, the mix would be 60 per cent shares and 30 per cent bonds/deposits. But now, they can raise the ratio of shares by 70 per cent and limit bonds to 30 per cent. While choosing bonds, one can again use the same mix with exchange traded funds (ETFs) or global bonds etc.

The mid-aged and above, who have five to 10 years to retire, have to explore investment in shares, as the online trading is picking up. Concentrate on high yielding and high net worth companies, which are paying huge dividends. This may be more beneficial as the market regulator Sebi is making it mandatory for the companies to announce the dividend policy, much in advance, so that the investors can plan for future income.

However, it may be fair for those older investors and those closer to retirement to continue with some interest-bearing investments, despite the rate cut.