Retiree should invest in Bank FDs or debt MFs?

Usually, a lot of people get conservative as they enter into their retirement phase. This is because of the fact that in retirement for most people there is low or no income. This makes them take a capital protection approach. Though there is nothing wrong with this approach, it is always wise to have at least 20 to 25 per cent of your portfolio in equities to take care of inflation during retirement years. However, most retired people prefer to park their investments either in life insurance policies or annuity plans by life insurance companies or the most favourite of all, bank FDs (Fixed Deposits). But the question is looking at the fall in the interest rates. Are bank FDs still worth your attention?

Let us take an example to understand this better. The average interest rates provided on the deposit term of 5 years for a senior citizen is 7.64 per cent and median of 7.75 per cent. So, assuming that you are investing Rs. 5 lakh in a 5-year bank FD which provides an interest rate of 7.75 per cent. If opt to reinvest the interest earned then you would be getting Rs. 7.26 lakhs at maturity. This means that you would earn Rs. 2.26 lakh as interest on the investment.

Now let us assume that you thought of investing in debt MFs rather than investing in bank FDs. Debt MFs generated an average 5-year return of 8.02 per cent. So, considering that you wish to invest Rs. 5 lakh for 5 years in debt MFs with 8 per cent rate of return. At the end of 5 years your Rs. 5 lakh have grown to Rs. 7.35 lakh. This means that you would earn Rs. 2.35 lakh, which is Rs. 9,000 more than investments, in bank FDs.

It is to be noted that the taxation part is not considered. For bank FDs as per recent amendments, interest earned on bank FDs for senior citizens is exempted up to Rs. 50,000. Though interest earned above Rs. 50,000 would be taxed as per the respective individual tax slabs. However, in case of debt MFs, 5 years being long-term, you are entitled for indexation benefit with 20 per cent tax.

Said that, if you are a conservative or moderately conservative risk taker then go for bank FDs. However, if you are a moderate to aggressive risk taker then go for debt MFs. Also, moderate to aggressive risk taker must consider having minimum 20 to 25 per cent of exposure towards equity funds.