Strategies to protect your income in a scenario of falling interest rates

Several products offer better rates, especially for seniors; that said, never try to optimise returns when you need money in the short term

The Reserve of India (RBI) has been reducing interest rates to try and shore up the economy. It has cut the repo rate by a cumulative 250 basis points (bps) to 4 per cent since February 2019. While this low interest rate environment is a boon for borrowers, it has made life more difficult for fixed-income investors, especially senior citizens. 

In another blow to these investors, the State Bank of India (SBI) on September 10 cut the rate on its one- to less than two-year fixed deposit (FD) by 20 basis points (bps). It now yields 4.9 per cent per annum. The same FD gave investors 6.5 per cent a year ago. Here are a few strategies fixed-income investors can explore in this declining interest-rate environment.

Understand the why: Before fixed-income investors can figure out the ‘how’, they need to come to grips with the ‘why’ of their situation. Says Sriram Iyer, chief executive officer (CEO), digital wealth management, Anand Rathi Wealth Management: “Investors need to understand the objective they are seeking to achieve. A senior citizen usually looks to achieve regular income to service his lifestyle needs. A non-senior person needs fixed-income to lend stability to his overall portfolio.” 

Know where you stand: The Covid-19 crisis has had varied impact on people. Says Suresh Sadagopan, Mumbai-based certified financial planner: “Even among those who have seen a 10-20 per cent salary cut, there are some who have no debt, and are in a sector that is expected to recover within six months. They need a different financial strategy compared to those who have seen a salary cut, have a modest income, and have EMIs to service.” 

The comfortable investor: Chasing higher yields when investing in fixed-income instruments for the short-term can be counter-productive. Says Iyer: “Never try to optimise returns when you need the money in the short term. Instead, try to optimise for tax, cost and risk when investing for shorter time spans. Only when investing for the long-term should you try to optimise your returns.”  

Non-senior investors who could need the money in the short-term should use debt mutual funds. They are more tax-efficient than FDs. Says Iyer: “Consider your liquidity needs as well. A person who wants a part of his money to be available on call should invest some in ultrashort term or short-term funds that could offer a 5-6 per cent return. Look at banking and PSU debt funds if you can invest for three years. If you can invest for a longer period, then dynamic bond funds are a good bet.” Adds Tarun Birani, founder and CEO, TBNG Capital Advisors: “If you invest in a corporate bond fund, be careful about the quality of the paper. The portfolio should be composed largely of AAA-rated and PSU and government papers.” Investors may also consider Bharat Bond ETF with a maturity of five years for locking in their interest rate today.” 

The distressed investor: Those who find themselves in dire financial straits should postpone investing for another day. Says Sadagopan: “Such investors should dip into their existing savings, continue to pay their EMIs and become debt-free at the earliest.” 

The senior citizen: Senior citizens should stay away from company FDs, according to Iyer. Sahil Arora, director, Paisabazaar.com suggests that conservative investors looking to enhance their interest income may consider opening FDs in small finance banks and some of the other smaller private-sector banks. “The highest FD slab rates offered by these banks are about 150-200 bps higher than the highest rates offered by major PSU and private-sector banks.” The deposit insurance programme protects each bank depositor of a scheduled bank in case of bank failures for their cumulative bank deposits, including current, savings, recurring and fixed deposits, up to Rs 5 lakh with each scheduled bank. Says Arora: “Those looking for higher FD rates with the maximum level of protection can spread their bank deposits of up to Rs 5 lakh with each bank offering higher interest rates on FDs.” Despite the protection, investments in such deposits should only form a limited portion of a senior citizen’s total corpus.

A few safe options that cater specifically to the needs of senior citizens are available. Says Sadagopan: "Senior Citizen Savings Scheme (SCSS) and the Pradhan Mantri Vaya Vandana Yojana (PMVVY) are some of the good income-generation options meant for senior citizens.” Both currently offer an interest rate of 7.4 per cent per annum. PMVVY is offered by the Life Insurance Company of India. Post Office Monthly Income Scheme is another safe avenue but the interest rate on it is lower at 6.6 per cent. Public Provident Fund (interest rate 7.1 per cent) and Kisan Vikas Patra (6.9 per cent) offer decent returns. However, they come with lock-ins.