Bank FDs or govt’s Senior Citizen Savings Schemes? What should retirees opt for?

Senior citizens often have limited choices when it comes to investing in fixed-income assets, where they must balance safety, liquidity, returns, and taxation. To safeguard seniors from fraudulent schemes in the market, the government offers a special investment scheme, the Senior Citizen Savings Scheme (SCSS), designed specifically for senior citizens, which provides a fixed 8.2% rate of interest per annum.

The scheme is safe with practically zero default risk. "The maximum a person can invest is ₹30 lakh in this scheme with a lock-in period of 5 years. This factor should be well thought of before investing your money, as it does not provide any liquidity, and in case one wants to withdraw before 5 years, it is allowed only with penalties," says Sameer Mathur, founder and managing director at Roinet Solution.

However, one should understand that risk and return represent two aspects of the investment equation, but numerous investors frequently misunderstand the true nature of risk. Although it is widely thought that increased returns result from accepting greater risk, the truth is that assuming more risk does not ensure higher returns. Numerous individuals have grasped this lesson through difficult experiences.

"This difficulty is heightened when selecting investment options post-retirement. At this point, your willingness to take risks usually diminishes, consistent income stops, and your retirement funds need to sustain you for your entire life," says Sanket Prabhu, director and head of wealth at FINHAAT.

Prabhu said that debt mutual funds, banks, and NBFC fixed deposits, and bonds in the secondary market can serve as alternative investment options for a senior citizen's retirement corpus. But SCSS enjoys a high interest rate ( 8.2% for this quarter), along with the assurance of sovereign support.

“Higher interest rates are generally appealing, but it's crucial for senior citizens to regularly assess whether the increased return justifies the extra risk taken. They must carefully analyse and take informed decisions for safeguarding their financial security during retirement," adds Prabhu.

While most experts suggest that senior citizens should consider safety more than just the numbers, Trivesh D., COO of Tradejini, says, "A 9% FD can look attractive, but such rates are usually offered by smaller banks or NBFCs, where the risk of failure comes into play, which is high compared to SCSS. The safety of your capital matters far more than chasing an extra half or 1%."

Abhishek Bhilwaria, CEO at BhilwariaMF, adds, "The 9% returns offered by some fixed deposits may look attractive on paper, but they often carry risks depending on the bank or institution."

A practical approach for senior citizens could be to park a larger share of their savings in SCSS for stability, while allocating a smaller portion to high-interest FDs.

Mathur says, "If the amount to be invested is higher than ₹30 lakh, then the rest of the amount can be divided as ₹5 lakh per depositor per bank, with multiple bank to the proportion of additional investment as there is an insurance protection limit of ₹5 lakh per bank per depositor under DICGC (Deposit Insurance and Credit Guarantee Corporation). It is a wholly owned subsidiary of the Reserve Bank of India, and is an integral part of the safety net in India."

Experts further suggest that senior citizens invest in a reputable and well-rated bank, rather than being lured by higher interest rates from NBFCs/small banks. Bank FDs can provide liquidity, as one can choose different tenures from various banks, depending on future requirements.

Most retirees seek a steady income and peace of mind, and therefore, SCSS outweighs the uncertainty that comes with higher-return FDs. In the long run, security and reliability tend to prove smarter than stretching for risky returns.