Senior Citizen with 85 Lac FD, Pension & PPF - How to Minimize Risk?

Ans: Your mother has a solid foundation in her finances. She has a significant amount in fixed deposits (FDs) worth Rs. 85 lakhs. She is also contributing Rs. 15,000 monthly towards mutual funds (MFs). Her PPF balance is Rs. 35 lakhs, and she is earning from two rental floors, bringing in Rs. 40,000 monthly. Along with that, her pension income is Rs. 50,000 per month.

Her financial base is strong. But it can benefit from diversification to reduce risks and improve growth.

Fixed Deposits: Safe but Limited Growth
The bulk of your mother’s wealth is in FDs. FDs offer safety and fixed returns, which are suitable for senior citizens. However, they do not provide protection against inflation.

Low returns: FD returns are often lower than inflation, meaning purchasing power declines over time.

Lock-in: Some FDs have lock-in periods, which reduce liquidity.

Recommendation: Instead of keeping the entire Rs. 85 lakhs in FDs, she could consider reducing this allocation. Keep some portion for liquidity and safety, but the rest should be diversified for better growth.

Public Provident Fund (PPF): Long-Term Safety
PPF is another safe investment with tax-free returns and the power of compounding. However, the lock-in period is long, and liquidity is limited.

Tax benefits: PPF offers tax deductions under section 80C and tax-free interest, which is a plus.
Recommendation: Continue holding the PPF, as it ensures long-term tax-free growth. However, given her age, she might not need to invest further, unless she aims to pass on a legacy. She could explore higher-return options with part of her corpus.

Mutual Funds: Growth-Oriented but with Market Risk
The Rs. 15,000 monthly SIP in mutual funds adds a growth element to her portfolio. However, market volatility can affect returns.

Actively managed funds: Actively managed funds can outperform index funds, as fund managers can make decisions to beat the market.

Diversification: If her MFs are focused on equity, consider adding more debt-oriented funds. Debt funds provide stability and steady returns, balancing out the risk of equity.

Recommendation: Review the current mutual fund portfolio. Ensure there’s a balance between equity and debt. It may be wise to reduce exposure to highly volatile funds and shift towards balanced or hybrid funds.

Rental Income: Stable but Uncertain
Her rental income of Rs. 40,000 monthly provides a steady source of passive income. However, rental income can be inconsistent due to tenant turnover or property maintenance.

Property maintenance: Ensure a portion of her rental income is set aside for property maintenance.

Diversification: Relying heavily on rental income may be risky in the long term due to real estate market fluctuations.

Recommendation: While rental income is reliable now, it is essential to have other sources of passive income. Diversifying into financial instruments can provide a buffer against possible income loss from property.

Pension: Secure but Fixed
The Rs. 50,000 monthly pension provides security. It covers daily expenses, reducing reliance on other investments.

Fixed income: The pension provides certainty, but as expenses increase with inflation, the pension might not suffice in the future.
Recommendation: Continue with the pension as a source of secure income. However, to counter future inflation, ensure part of her investments focus on growth.

Diversification Strategy: Minimize Risk and Maximize Returns
Your mother’s current portfolio leans heavily towards safety (FDs, PPF, and rental income). While this is good for preserving capital, it may not keep up with inflation or provide sufficient growth. A balanced approach with low-risk instruments and growth-oriented investments would be ideal.

Move part of the FD corpus to debt mutual funds: Debt mutual funds offer better returns than FDs while maintaining safety. They are more liquid and have better tax efficiency. She can explore short-term and ultra-short-term debt funds for parking funds with low risk.

Add balanced mutual funds: Balanced or hybrid funds offer exposure to both equity and debt. These funds provide a safer alternative to full equity exposure while still offering growth potential. They reduce volatility while providing better long-term returns than FDs.

Senior Citizen Savings Scheme (SCSS): If not already invested, SCSS is an excellent option. It offers guaranteed returns, and the interest rates are higher than FDs, along with tax benefits under section 80C.

National Savings Certificates (NSC): NSCs offer a fixed interest rate and are safe. These can be a part of the portfolio for guaranteed returns. However, the liquidity is restricted, so it’s important to ensure not all funds are locked in.

Systematic Withdrawal Plan (SWP) in Mutual Funds: An SWP can offer a steady income stream from mutual funds. It is more tax-efficient than FDs or rental income. Your mother can invest a portion of her lump sum in debt funds and set up a SWP to withdraw a fixed amount monthly.

Emergency Fund and Liquidity
It is essential that your mother has an emergency fund. This should cover at least 6 months of expenses. While FDs can serve this purpose, a part of the emergency fund can also be kept in liquid mutual funds.

Liquid funds: These funds offer easy liquidity and slightly higher returns than savings accounts.
Recommendation: Ensure she has Rs. 3-5 lakhs in a liquid fund for emergencies. This ensures liquidity and access to funds without compromising long-term investments.

Regular Monitoring and Review
Her portfolio should be reviewed regularly to ensure it meets her goals. If any investment underperforms or if her needs change, adjustments can be made.

Market conditions: Financial markets fluctuate. Ensure her portfolio is reviewed every 6-12 months.

Tax planning: Ensure her investments are tax-efficient. Use tax-saving instruments but balance them with growth-oriented options.

Recommendation: Set regular reviews with a Certified Financial Planner (CFP) to align the portfolio with changing goals and market conditions.

Estate Planning and Succession
As she grows older, estate planning becomes important. It ensures that her assets are passed on according to her wishes.

Nominees and will: Make sure nominees are assigned to all her investments, and she has a clear will in place to avoid any legal complications.
Recommendation: Consult with an expert to create a comprehensive estate plan. This will ensure her wealth is distributed as per her wishes.

Insurance and Health Coverage
Your mother may already have health insurance, but it’s crucial to ensure adequate coverage as medical expenses rise with age.

Health insurance: Ensure she has sufficient coverage. A senior citizen health insurance plan might be necessary if she doesn’t already have one.
Recommendation: Review her health insurance policy to ensure it covers her needs. If necessary, add a senior citizen plan for better protection.

Finally
Your mother has a well-structured financial foundation. However, her portfolio can benefit from some diversification and risk management. While FDs and PPF provide safety, the returns may not outpace inflation in the long term. A mix of debt funds, balanced funds, and tax-efficient withdrawal strategies will provide better returns while maintaining safety. Regular reviews will ensure that her portfolio aligns with her evolving financial goals.

By diversifying her investments and ensuring a balance between safety and growth, she can continue to enjoy financial security while minimizing risk.

Best Regards,
K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in