Investment avenues for elders without pension

As one grows older and is faced with the harsh reality of life one realises that one has to provide for ones old age. If your are in the government sector you are lucky because after you retire the government will take care of you, but woe betide if you are in the private sector and have no hope of getting a regular pension when you retire.

Even though you will be getting your provident fund and gratuity, you have to realise that in this day and age just this money is not enough to carry you through those golden years. And if those golden years really have to be golden, you have to plan way in advance and ensure that you save at least thirty per cent of your salary regularly every month.

You might say what do we have to save so much, for our children will look after us. But one must realise that with the way inflation is going, even if they want to, your children might not be able to provide for you in your old age. And would you rather not be independent and live a life of dignity than be a source of pain to your children.

So, it is much better to save now than to beg your children for money in your old age and be a burden on them. And what better way to do it than through monthly income plans (MIPs).

MIPs are one of the most sought-after products for those people who want to have a fixed amount every month to meet their expenses. For years, regular MIPs from the Unit Trust of India (UTI) were perhaps the most popular investment avenues with retirees.

They gave assured returns in the from of post-dated cheques. The rate of return had been coming down steadily over the past few years. But in keeping with the trend of assured returns earning a lower rate of return, MIPs have now stopped giving a fixed monthly return.

The last MIP from the UTI linked returns to a market-linked net asset value (NAV).

This absence of guaranteed returns has hit the investor hard. A person who is dependent upon a monthly cheque to meet his daily expenses does not want to see fluctuating returns. In the new breed of MIPs from mutual funds, an investor might not even get a cheque at all for a particular month. The reason is that these MIPs have an equity component, and stability of returns cannot be guaranteed.

So, in such a situation, what is an investor required to do. It would be advisable to take a closer look at the last MIP from the UTI in January 2001.

The good point about the scheme is that all the interest and dividend are fully exempt from income tax under Section 10(33) and hence it is very good for people in the highest tax bracket.

The investor has the option to extend his investment beyond five years. His capital is adequately protected from February 22, 2006.

There are also chances of capital appreciation, as redemption will be on prevailing NAV or par value, whichever is higher. The problem is that returns are assured only for the first year, and interest rate for subsequent years will depend on the discretion of the trustees.

There is also a lock-in period of three years. The units can be redeemed after three years only at NAV, and will attract capital gains tax if NAV is higher than par value.

The MIPs from other mutual funds also have similar features. These schemes are recommended only for those people who have an alternate source of monthly income and belong to a higher tax bracket.

But the good news is that there there are other alternatives for investors in mutual funds. Investors looking for monthly income can go for something called a systematic withdrawal plan (SWP) of debt withdrawals from an initial lump-sum investment in a pure debt fund like SBI Magnum Liqui-Bona Fund or Templeton India Income Fund.

The beauty of SWP is that it offers the investors the option to take either a fixed amount every month or a variable amount. For example, let us consider an initial investment of Rs100,000 in a debt fund, with a monthly withdrawal plan of Rs1,000 per month.

You might think that your initial investment is coming down by Rs1,000 per month. But that is not the case. In fact, your initial lump sum of Rs100,000 will not only be intact, but may even increase in value.

An analysis of the SWP of Templeton India Income Fund shows that an amount of Rs100,000 invested in April 1999 had a closing balance of Rs105,429 after three years. This is after you withdrew a Rs1,000 every month for the last three years. So, go in for these plans and rest easy and be assured that you can have your cake and eat it too.

R. Dyes is a journalist based in New Delhi.