Changes in the investment landscape mean that your parents might need your help with their finances. Here’s how you can assist them in staying on track.
BABAR ZAIDI – ET Wealth – 23/01/2012
Imagine driving into a new city only to discover that your road map is outdated. The road signs confuse you and passersby either have incomplete information or deliberately mislead you. Many senior citizens don’t have to imagine. This is the harsh reality of their financial situation. The financial landscape has changed completely, with traditional fixed income schemes now offering market-linked returns. Other investment options are too complex or too costly. To make matters worse, unscrupulous agents are forever trying to palm off high-commission investments to gullible retirees.
If your parents too find themselves at this financial crossroad, you need to step in. There was a time when they looked after you, helping, guiding and supporting as you went through life. You might find that the roles will have to be reversed. In the winter of their lives, your parents could need your help. Even if they are financially independent, senior citizens require assistance to navigate the maze of new opportunities, to adapt to the fast-changing investment environment and, most importantly, to safeguard themselves against the perils that lurk in the new financial ecosystem.
Stepping in to assist an ageing parent on financial matters is not as easy as it may seem. Money is a sensitive subject and you need to be gentle and encouraging. Remember that you are an assistant; never give the impression that you are in charge (see box).
Start by making an inventory
The first thing to do as your parents’ wealth manager is to make an inventory of their income and investments. List all the sources of income, including their pension, dividends and interest on fixed deposits. Then prepare a portfolio of investments, including bank deposits, funds, stocks and insurance policies. It is generally observed that older people are methodical in documenting their financial details. If you are lucky, your parent would already have such a list with relevant details, such as the amount invested, date of maturity and interest payment.
This listing is important because it gives you a 360 degree view of your parents’ financial situation. It also tells you whether you need to reallocate some of the resources to optimise the returns of the portfolio. Most senior citizens, including Pune-based Ashok Chawla (see picture), are obsessed with guarantees and will invest only in options that promise a fixed return, however low it might be. It took his son Satyam several weeks to convince his father to invest a small portion of the portfolio in equity funds to beat inflation and replace bank fixed deposits with the more flexible and tax-efficient debt funds and FMPs.
Of course, the allocation would depend on a lot of factors, including your parents’ age, their health condition and life expectancy and, ultimately, their overall asset base. At 60, a retiree with normal health will need to plan in a way that his corpus lasts him at least 20 years. Given his investment horizon, he can allocate up to 10-15% of the corpus to stocks. If he has enough wealth, he can raise this amount to 40-50% of the portfolio. But for someone who hasn’t got too much to invest, stocks cannot be an option and he must have a 100% debt portfolio.
Banking on assistance
Managing bank-related work is one of the biggest headaches for a 60-plus customer. It becomes worse if the senior citizen is not very mobile and needs assistance when he ventures out of the house. For such people and those who are handling their finances, online banking is a godsend. With a few clicks of the mouse, they can do within 5-10 minutes what could otherwise take 1-2 hours. What’s more, it can be done from anywhere and at any time. Also, the spread of ATMs means that your parents can access their bank accounts even after regular hours.
Unfortunately, many senior citizens are not very trusting of the online channel and plastic contraptions. They still prefer the traditional bank branch route and you might have to squeeze in a visit to the bank into your monthly schedule. If your parents also think like this, you will need all your persuasive skills to get them to embrace technology. A small demo with your own account could be helpful in introducing them to Net banking. Let them conduct a few transactions online on your account to get the hang of it.
In fact, it would be a good idea to tell them how Netbanking can help you check your bank balance and account statements without any hitch. Once they see technology at work and understand the safety measures that are in place, they may be more amenable to banking online, which in turn could make your job of handling their finances far easier.
It could also become simpler if your parents make you a joint accountholder. Then, you will be able to operate their bank account without any hitch. This is especially advisable when the parent is too old or frail to sign cheques or other documents.
This assumes greater importance if your parents have a bank locker. Many banks declare a locker inoperative if it isn’t used at least once in six months. Forget it for a year and the bank can even cancel the allotment. When 74-year-old Kusum Gupta got a letter from her bank, informing her of this new rule in 2010, she immediately made her favourite grandson Akshay, 20, a joint accountholder. “He can drive down to the bank any time and operate the locker. I will not be under any compulsion to visit the branch every six months,” she says.
A note of advice here: don’t hold it against your parents if they decline the suggestion to make you a joint holder. It’s an age at which their financial independence means a lot to them (see box).
Best ways to invest
Unlike investors at other stages of their lives, most senior citizens don’t have too many complicated goals. “There aren’t too many imponderables. At that age, you only have two basic goals—generating a monthly income for yourself and leaving a legacy for your heirs,” says Kamal Rampuria, senior vice-president of Delhi-based AUM Capital. This also means that unless your parents have an enormous amount of wealth to invest, you don’t need an expert’s help in developing a plan for them.
The Senior Citizens’ Saving Scheme (SCSS) is a good option if your parents need regular income. Each of them can invest up to 15 lakh in this governmentsponsored ultra safe scheme. What’s more, they even get tax deduction under Section 80C for their investment in this scheme. From this year, the interest rate has been linked to thegovernment bond yield in the secondary market. The interest is paid out every quarter and is fully taxable.
Fixed deposits are even better, with many banks offering seniors more than 10% interest. These high interest rates could go down in the future, but there’s no point in locking up all of your parents’ money in long-term deposits. It’s best to invest in fixed deposits of different maturities. Instead of making one lump-sum investment in a 5- or 10-year fixed deposit, spread it over 5-6 different tenures. When the shortterm deposit matures, the proceeds are reinvested in a longterm deposit. By building such a ladder of deposits, you can ensure
that your parents have some deposits maturing every few months without missing out on the high rates on long-term deposits.
There are also corporate fixed deposits, but experts sound a warning note. “Corporate fixed deposits offer higher rates than bank FDs, but go for the ones with a high credit rating,” says Satkam Divya, business head, Rupeetalk.com.
Steer clear of NSCs as well, even though the interest rates have been hiked to 8.2% (5 years) and 8.7% (10 years). Even if the objective is to save tax under Section 80C, five-year FDs are a far better option. The best offer is from the Oriental Bank of Commerce, which is giving senior citizens 10.25% on taxsaving FDs. It should be your parents’ preferred tax-saving option this year.
If your parents need monthly income from their fixed deposits, you will have to structure the investments in a way that they don’t lose out on the interest. The rates for deposits that give a monthly income are usually 50-100 basis points lower than those offering quarterly or annual payments. Kolkatabased bank manager Amitava Bhattacharya (see picture) has divided his father’s fixed deposits in such a way that even though the interest is paid out every quarter, there is some income coming his way every month. “This ensures that my father does not lose out on the interest,” says Bhattacharya.
Time to go beyond FDs
While fixed deposits offer assured returns, it’s a good idea to look beyond banks for debt investments. Debt funds, especially fixed maturity plans, can give higher returns than fixed deposits. What’s more, these investments are more liquid and tax-efficient than fixed deposits. The interest earned on bank deposits, SCSS and NSCs is fully taxable. But when you withdraw from a debt fund, only the capital gain earned per unit is taxable.
So, if you invest when the NAV is 15 and withdraw when it rises 10% to 16.50, only 1.50 of your withdrawal will be taxed. The balance 15 is the principal investment and is, therefore, not taxed. After one year of investment, the profits are treated as long-term capital gains and are taxed at a lower rate of 10%. However, this advantage will vanish after the new Direct Taxes Code comes into effect and there is no distinction in the tax rate for long- and short-term gains.
The best thing about funds is the flexibility they offer. An investor can customise the withdrawals to suit his needs. Your parents’ bank deposits will give a fixed income, year after year. A 10 lakh investment earning 10% a month will give them roughly 8,333 per month. But inflation could render this income insufficient over the years. In a mutual fund, they can choose the income they want every month. Say, they start withdrawing 8,333 a month in the first year, but increase it to 9,000 a month in the second year (8% inflation), and to 9,700 in the third year. This way, they can also develop a draw-down plan to suit their age and life expectancy.
How to tackle inflation
If inflation is the worst enemy of the retiree, stocks and gold are their biggest weapons against this stealth bomber. While it is easy to get the older generation to invest in the yellow metal, not many are willing to put their money in stocks. Like most people her age, Bangalore-based retired lecturer Kaveri Biswas, 75, also prefers investments that offer assured returns. “It was difficult to convince her to invest in equity funds, so I have opted for a mix of balanced funds and gold investments,” says her son Dipankar (see picture).
If you too face this problem, get your parents to invest in monthly income plans (MIPs). These funds invest a small portion (15-20%) of their corpus in equities and are, therefore, able to generate better returns than 100% debt investments. In the past three years, the average MIP has given annualised returns of over 9%, while bank deposit rates hovered at around 7-8%.
Unlock the value of house
Are your parents asset-rich but income-poor? Many senior citizens have a big chunk of their net worth locked up in the real estate they occupy. Here again, a change in the mindset can lead to a comfortable retired life if they reverse mortgage their house. Under this arrangement, a bank starts paying the owner an EMI for his house. A house valued at 70-80 lakh can generate a monthly income of about 18,000-20,000. After the owner’s death, his heirs can repay the loan and get back full ownership. If they don’t, the property is sold and they get the proceeds after subtracting the amount disbursed to the owner till his death and the interest that accrued to the money.
No comments:
Post a Comment