SCSS vs debt funds: Striking the right balance for retirement

Since the government raised the Senior Citizens Savings Scheme's (SCSS) maximum limit from Rs 15 to Rs 30 lakh earlier this year, 78-year-old Venkatesh Dhanwantari wants to know if he should move his money from debt funds to SCSS.

Here's what we suggest Mr Dhanwantari and other senior citizens to consider:

• Senior Citizens Savings Scheme (SCSS) for guaranteed regular income. As stated earlier, the maximum investment amount is Rs 30 lakh.
  
• Some portion of the money to be in debt funds for liquidity and rebalancing.
  
• At least one-third money can be invested in equity. It will ensure the retirement corpus doesn't eventually run out.

Let's first understand why SCSS deserves priority.

SCSS

Key benefits

• High returns: SCSS offers 8.2 per cent per annum, translating to Rs 2.46 lakh annually on a Rs 30 lakh investment.
  
• Safety: It is one of the safest fixed-income instruments.
  
• Tax benefits: Investments qualify for deductions of up to Rs 1.5 lakh under Section 80C, and senior citizens can claim a tax exemption on interest up to Rs 50,000 annually.

That said, SCSS does have its limitations: a) the SCSS interest is added to taxable income, which may reduce net returns for those in higher tax brackets. b) it has a five-year tenure (extendable in the block of three years). Premature withdrawals attract penalties of up to 1.5 per cent of the principal.

Debt funds

• This is where debt funds can come in handy. Unlike with SCSS, you can withdraw money from debt funds whenever you need it.
  
• In addition to allowing you to withdraw money at any given time, debt fund gains are taxed only when you withdraw, allowing you to defer tax liability.
  
• Further, debt funds help rebalance your portfolio annually. For instance, if your equity portfolio dips, you can withdraw from debt funds and restore your equity allocation.

But do keep in mind that unlike with SCSS, debt fund returns are not guaranteed. These depend on factors like interest rate movements.

Additionally, debt fund gains are now fully taxable, reducing their post-tax appeal compared to earlier rules.

Equity

A well-balanced retirement portfolio should include equity for growth. They can provide inflation-beating returns in the long run, thus giving your portfolio enough legs to sustain your lifestyle in your silver years.

To sum up, a combination of SCSS, debt funds and equity funds are the three investment avenues retirees should consider to enjoy stability, liquidity and inflation-beating growth.

For retirees seeking expert guidance on the best debt funds, head over to Value Research Fund Advisor. Explore curated recommendations and detailed insights to make informed decisions for a secure and fulfilling retirement.

Also read: Debt funds or fixed deposits: Where to park your money?