Q1. We are a group of friends in the same age group. All of us are turning 60 in a couple of months to a year. We have been planning to invest in the Senior Citizens Savings Scheme. What do you suggest?
Senior Citizens Savings Scheme, popularly known as SCSS, is a government-backed retirement scheme. SCSS offers regular income generation and an interest rate higher than bank FDs. As a scheme backed by the government it offers greater safety and is not affected by stock market volatility.
Only Indian residents of age 60 years or more can invest in this scheme, singly or jointly. In the case of a joint holding, only the age of the first holder is taken into consideration. Defence personnel who are above the age of 50 but below 60 can invest in the scheme. So can citizens who have opted for voluntary retirement and are in the age bracket of 55-60 years. The scheme is not open to Non-Resident Indians (NRIs), Hindu Undivided Families (HUF) and trusts.
Unlike the Public Provident Fund (PPF), SCSS requires a lumpsum investment and the interest is payable on the first day of each quarter. The government decides the rate of interest, which is currently 7.4% per annum.
The minimum amount of investment is ₹1000 and maximum amount is ₹15 lakhs per head. Incase of a joint account one can invest upto ₹30 lakhs. Five years is the tenure of SCSS, and it may be extended by 3 years within one year of maturity.
Investments in SCSS are eligible for tax benefits up to a limit of ₹150,000 under Section 80C. The interest is taxable if the total interest earned from all your SCSS accounts exceeds ₹50,000 in a financial year.
You cannot obtain a loan against SCSS but can exit the scheme before its maturity. No interest is payable if the account is closed within one year and any interest already paid would be recovered from the principal amount. If the account is closed after 1 year but before the completion of 2 years, then 1.5% is deducted from the principal amount. Similarly, if the account is closed after 2 years but before completion of 5 years, then 1% is deducted from the principal amount.
You may open an SCSS account with the post office or a scheduled commercial bank where you have an active account.
Q2. I have been investing for the last 10 years with the help of my financial advisor. We also did financial planning for me and my family. For some time, she has been insisting that while we do a review of the financial plan, we should also review our risk profile. Is it necessary? As everything is going smoothly, how can my risk profile change?
Your financial advisor is right when she insists on a fresh risk profiling along with every financial planning review. The reason why the Securities and Exchange Board of India (SEBI) has made risk-profiling mandatory for investors is because it is one of the most important steps to follow while investing or planning your finances.
Risk profiling is the process of evaluating one’s willingness and ability to take risks. With time and age, both can change. Your tolerance towards risk would be different at different stages of life. That is why it is important to refresh the risk profile at the time of every financial planning review to ensure the right product mix and proper asset allocation.
You would be surprised to see how your risk profile or risk score has changed over a period. This is natural. As the time passes, our goals (short term as well as long term) change, and so does our risk tolerance.
For example, someone young and unmarried in the mid- or late-20s may have higher risk appetite than a professional in mid-30s, married and with kids, who in turn, will have a higher risk appetite than a retired professional. This happens because of financial obligations and changes in responsibilities and goals.
The young individual may want to invest a large chunk of funds in equities in pursuit of faster, but riskier growth. Someone in midlife may want to strike a balance between equity and safe growth. A retired investor will be happy with capital protection and regular income.
Your risk-bearing capacity is decided by the balance between your assets and liabilities. If you have more assets and less liabilities, you are willing to take more risks. When the liabilities are more than the assets, you would rather avoid risk.
Similarly, the risk profile or risk score tends to change when an individual is undergoing major changes in life or a transition to a different stage of life. For example, a businessperson whose business was hit by the pandemic, might want to protect his capital, and safeguard his investments. A newly married couple with double income may want to be aggressive with their investments and earn higher returns to ensure their goals are met.
As an investor, a review of your risk profile can help you in understanding your investments better. It also helps to ascertain that in the worst-case scenario, you will not lose more than you can afford and accept.
Risk profiling also helps you to have the right asset allocation in growth and stable products. It also helps you identify the most suitable avenues and opportunities which are in alignment with your financial goals and objectives.
So, go ahead and complete your risk profiling before you review and realign your financial planning! Otherwise, you could be taking a risk!
Q3. My spouse is a homemaker, while I have my own business. We have two daughters, 7 and 5. Recently, my business partner, whose spouse is also a homemaker, took life insurance in her name. This has made me wonder if I should also get a cover for my wife. Would it be possible since my wife does not have any other income than interest income?
In most Indian households, the earning member of the family opts for a life insurance cover, whereas the spouse who is the homemaker, does not opt for the same, thinking that they do not have any income.
While they may not bring any income to the table, the money that they help the family save is quantifiable and can be added to the total income. The absence of a homemaker leads to additional expenses and financial obligations.
Playing the role of the family manager, the typical chores usually managed by the homemaker, are very many. In case of their untimely demise, a void is created which can never be filled. Purely from the financial point of view, their replacement cost as a family manager will disrupt not only your monthly budget but also your plans. But, if the homemaker has an insurance cover, then it gets much easier to take care of these additional expenses.
Very often, homemakers ignore their own health and wellbeing while looking after their family. Most life insurance policies also offer critical illness cover along with term insurance. In case of a critical illness, the expenses can be met by the policy so that financial plans and goals of the family are not disturbed.
It is noteworthy that term insurance cover along with critical illness cover come at a lower cost. It helps the homemaker ensure that even in their absence, the family is provided for. Also, they do have a tax benefit under Section 80C and Section 10 of Income-tax Act. You can also opt for joint term insurance plans, or separate ones.
Until now, the life insurance cover for spouses was available only as an add-on cover on the life insurance cover for their husbands. However, now, individual, independent term insurance plans are available for the spouse, where the household income needs to be more than ₹5 lakhs.
So go ahead and protect the pillar of your life with term insurance and critical illness cover. Your family needs it.
Q4. I am a 27-year-old working woman. A friend suggested that investing through ETFs is better and cheaper than investing in other index mutual funds. What is your opinion?
Exchange Traded Funds, more commonly known as ETFs and index funds have some similarities. Both replicate the index (like the Nifty 50). Both offer lower expense ratios as compared to other mutual funds. However, the difference is in the way they are traded.
As the name suggests, ETFs are traded on the exchange—Nifty or BSE. This means that for trading in ETFs, you need to follow the same rules as those for trading in equities/ shares of a company. To invest in ETFs, you must have a demat and trading account in place, whereas you do not need this account to invest in index funds.
ETFs can be bought and sold on the exchange during trading hours, at the prevailing applicable rate or net asset value (NAV). Hence, the price of ETF may fluctuate during the day. On the other hand, index funds are traded at the closing NAV of the day when the buying or selling takes place. No matter at what time you authenticate the transaction, the applicable NAV would be the closing NAV on that day.
Both ETFs and index funds have lower expense ratios as compared to other mutual funds. The reason being that both ETFs and index funds replicate the index and, hence, are passively managed. However, between the two, ETFs have the lowest expense ratio, which could be as low as 0.05%, compared to the 0.20% to 0.30% range applicable to index funds. However, there are other expenses connected to the trading of ETFs like brokerage, STT, GST, stamp duty, etc. These increase the cost of ETFs, while these expenses are not applicable for index funds.
Since the price of ETFs may fluctuate during trading hours, it becomes important to time the market at times. For index funds, you do not need to time the market on the day you buy or sell the units. Because of the costs attached to trading as mentioned earlier, an investor may feel that his cost is higher than the selling price. On the other hand, for index funds, the closing NAV at which the units are allotted or sold, may be higher or lower at the time of closing than at that time when the transaction was executed or authenticated.
As an investor, you should evaluate both the options on the basis of comfort, convenience and understanding, and take a decision on where to invest.
If you are an investor who would want to invest the money and let it grow, index funds are a better option. And if you are an investor who understands the market (at which price to buy or sell) and has the time to trade, you can look at investing in ETFs.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
International Money Matters Pvt Ltd is a SEBI registered personal finance firm.