Category: Personal Finance

How a senior citizen can generate more income amid low interest rates

Personal Finance

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Mr Ramesh is 70 years old. He is retired and has no financial dependents. He has been a very conservative investor and has never invested beyond bank fixed deposits, provident fund or insurance policies.

His total portfolio is about ₹1 crore. From this portfolio, he has maximised investments in Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS). He has invested ₹15 lakh in each of these schemes. The remainder of his portfolio (₹70 lakh) is in bank fixed deposits.

The SCSS and PMVVY schemes give him an annual interest income of about ₹2.25 lakh per annum. His requirement is about ₹50,000 per month or ₹6 lakh per annum.

Until now, the interest rate from bank fixed deposits was comfortable enough to bridge the deficit amount (about ₹3.75 lakh). In fact, Ramesh was able to save some money from his interest income, which was also helping his portfolio grow. He hoped this slow growth in portfolio could at least match the inflation in expenses to some extent.

The bank fixed deposit rates have gone down in the recent past. This means his bank fixed deposits will be renewed at lower interest rates, resulting in reduction of income.

Ramesh is worried that he may not be able to sustain on such low interest income and his portfolio may start depleting. Smaller portfolio means lesser income and greater deficit, which needs to be funded by breaking fixed deposits. This can become a self-reinforcing cycle and his portfolio can deplete fast.

Ramesh is looking for a high-income product with low risk.

Recommendations

Let’s look at the options.

Ramesh can go with corporate fixed deposits that may offer a higher rate of interest than bank fixed deposits, but he is not comfortable with credit risk of corporate fixed deposits. Debt mutual funds won’t suit him for the same reason. Moreover, at his level of income, tax efficiency of debt funds does not come into picture either.

Another option is to go with potentially higher-return products such as equity funds, but such products come with higher risk of capital loss. Moreover, since Ramesh needs to withdraw from this portfolio, adverse market movements can make rupee-cost-averaging work against him. Thus, at his age and with his risk appetite, this may not be a good choice. Also, Ramesh is not comfortable with this option.

A third alternative is to open bank fixed deposits with newer banks that are offering a higher rate of interest, but Ramesh is not comfortable with this option either.

Given this background, in our opinion, Ramesh must explore purchasing an immediate annuity plan without ‘return of purchase price’. In this variant of annuity plans, the insurer does not return the investment amount or the purchase price to the investor’s family in the event of investor demise. Thus, the insurance company can afford to pay a much higher rate of interest.

For instance, even during these times of low interest rates, the annuity rate for a 70-year-old will be 10-10.5 per cent pa. To cover the deficit of ₹3.5 lakh, Ramesh would need to invest only ₹35 lakh. And this interest rate is guaranteed for life.

When his PMVVY and SCSS mature, this money can either be put back into the respective schemes or into an immediate annuity plan. The immediate annuity plan without return of purchase price will likely generate much higher income than PMVVY and SCSS, at his age.

In fact, the annuity rate for a variant without return of purchase price increases with age. Hence, the annuity rate for the entry age of 75 will be much higher than the annuity rate for the entry age of 70.

To counter inflation, Ramesh can stagger annuity purchases for small amounts in the future.

The caveat with an annuity plan without return of purchase price is that, in the event of early demise, it might look like a waste of money. His family won’t get anything. Therefore, this approach would have been a problem if he had financial dependents or if he wanted to leave this money as legacy. Since he does not have such limitations, an annuity plan without return of purchase price is a good way to maximise income at very low risk.

He will also lose access to this money. This could have been a problem, but he has investments outside of this annuity plan, too.

Another point to note is that GST at 1.8 per cent of the purchase price will be applicable. So, that has to be taken into account while arriving at the purchase price, based on the annuity requirement.

Since Ramesh does not have to worry about income generation now, the remaining ₹35 lakh (₹70 lakh minus ₹35 lakh) can be invested freely. He can consider keeping a portion of this money as an emergency fund. He can even take some risk with this money for growth and build legacy for his family.

Alternatively, he can simply put the remaining ₹35 lakh in bank fixed deposits. His portfolio will gradually keep growing. As his income requirements grow, he can take some money out of FDs and buy an annuity plan to bridge the income deficit.

The writer is a SEBI-registered investment advisor at personalfinanceplan.in

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All you need to know about health insurance waiting periods

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Insurance regulator IRDAI has mandated that the waiting period for pre-existing diseases should not go beyond four years (48 months) in any health policy, effective October 1. But this is not the only waiting period component in a health policy.

For instance, if you sign up for a new health policy, you will have to wait for a minimum period before your health cover starts.

Maternity covers and some other specified diseases also have a waiting period before claims can be entertained.

Waiting period ensures that insurers do not cover for claims that are certain and predictable. The clause helps prevent their losses. Waiting period is an important clause and every policyholder should be aware of its nuances to avoid unnecessary hassles at the time of claim.

Waiting period, which is applied from the date of policy commencement, varies depending on the ailments, and differs from one insurer to another.

Varying time-frames

If you buy a health plan, you have to mandatorily wait for a period of 30 days, known as initial waiting period, from the date of commencement of the policy. During this period, the insurance company will not admit claim for diseases or hospitalisation except for accidental injuries, provided the policy covers such accidental injuries.

Now, if an individual has an existing medical condition (known as pre-existing medical condition) before the commencement of health policy, he/she has to wait for a few years before the cover begins. However, excluding that particular medical condition, the policyholder will be covered for other illnesses/accidents, post initial waiting period.

The ‘pre-existing waiting period’ is usually 48 months among most insures but some insurers have only 24-36 months as pre-existing waiting period.

For instance, for Optima Restore policy from HDFC Ergo Health, the pre-existing waiting period is 36 months.

There is another type of waiting period for specific diseases or specified procedure and this, too, varies from one insurer to another. Insurers usually have a common list of specific diseases or a list of medical treatments for which this waiting period will apply.

For instance, ManipalCigna’s ProHealth policy has a disease/procedure-specific waiting period of 24 months (two years), after which the expenses for the same will be covered. The list of specific diseases/procedures includes cataract, knee replacement surgery (other than caused by accident), and varicose veins or ulcers.

But keep in mind that if these diseases exist at the time of taking the policy or it is subsequently found that they are pre-existing, the pre-existing diseases waiting period will apply.

Insurers usually have a waiting period of 90 days (from the date of commencement of policy) in case of critical illness or lifestyle-related diseases, including cancer, hypertension and cardiac conditions.

Health policies that offer maternity covers also have waiting period (for mothers and new-borns). Any treatment arising from pregnancy to childbirth including Caesarean sections will be covered under a policy only after the expiry of the waiting period. For instance, ProHealth policy from ManipalCigna covers maternity expenses only after expiry of 48 months. Similarly, Digit Insurance’s health policy, too, has a two-year waiting period for maternity cover.

Lastly, most insurers have personal waiting period which may be applied (from the date of policy commencement) to individuals depending on the declarations made by him/her at the time of taking the policy and the existing medical conditions. Factors including medical history, pre-existing medical conditions, medical test results and current health status will be taken into account by the insurer for applying this waiting period.

In Max Bupa’s ReAssure policy, for instance, personal waiting period is applicable for a maximum of 24 months, while in ProHealth policy (ManipalCigna), it is applicable for a period of 48 months. Personal waiting period will be specified in your policy document and will be applied only after you give your consent. If you decline, your application will be cancelled and premium, if any paid, will be refunded.

But most of the time, personal waiting periods are not applied by the insurers.

Points to note

There are a few points to keep in mind about the waiting period clause in health insurance.

One, you can reduce your waiting period. If you feel the pre-existing or disease-specific waiting period is too long, some insurers let you reduce the same.

But you might have to cough up additional premium.

For instance, in the case of ICICI Lombard’s Complete Health insurance policy, you can reduce the pre-existing waiting period if you opt for sum insured (SI) over ₹2 lakh.

The waiting period comes down to 24 months from 48 months. Similarly, in ProHealth policy (ManipalCigna), you can reduce your waiting period if you opt for a higher variant of the policy.

The pre-existing waiting period is reduced to 24 months in ‘Plus’ and ‘Accumulate’ variant while it is 36 months for the ‘Protect’ variant and 48 months in other variants.

Two, if you renew your health policy without any break in premium payment, the policy continues to cover you.

But if you renew your policy after a break, you may have to undergo another waiting period similar to what a new policy entails.

At the time of porting, too, if you continue the policy without any break, your waiting period will be as per the new policy or as per your health status at the time of porting.

However, if you enhance your SI (at the time of porting as well as in an existing policy), the waiting period shall apply afresh to the extent of increased SI.

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New health insurance guidelines and what they mean for you

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In the recent past, insurance regulator IRDAI came out with standardised, customer-friendly guidelines for health insurance policies. These changes are implemented from October 1, 2020 and are largely expected to benefit the policyholders. Here’s more :

 

Definition of pre-existing diseases

One of the important amendments is the change in the definition of pre-existing diseases (PED) in health policies. This is because the old version had ambiguity in terms of what constitutes a pre-existing disease. Also, all conditions for which the person had signs/symptoms in the 48 months before taking the policy were considered PED.

IRDAI has changed this definition and has offered more clarity. As per the new definition, pre-existing disease means any condition, ailment, injury or illness that has been diagnosed by a physician/doctor within 48 months prior to the effective date of the policy issued by the insurer or its reinstatement; Or for which medical advice or treatment was recommended by, or received from, a physician within 48 months prior to the effective date of the policy or its reinstatement.

Changes in proportionate deductions

Liability of a health insurer is limited to the extent specified in the policy, and these are termed as sub-limits. The sub-limits are applicable mostly in cases such as room rent for hospitalisation, ICU, OPD (out-patient department) and ambulance cover. So, if you exceed the limit prescribed, the extra amount has to be paid from your pocket. That is, based on the type of room you occupy at the hospital, the cost of associate medical expenses also changes.

Higher room cost would mean the cost of associate medical expenses will also be higher. For instance, due to an emergency, assume someone is hospitalised in a room with a rent of ₹6,000 per day (while it a ₹4,000 a day limit in his policy). This increase of ₹2,000 in room rent will be applicable proportionately on associate medical expenses as well, such as doctor’s fees and nursing charges (in the ratio of room rent eligible to actual room rent). So, if the proportionate increase in medical expenses works out to ₹80,000 and the total hospital bill works out to ₹3 lakh, then the insurer will settle ₹2.2 lakh.

So to standardise the claim settlement in health policies, the regulator has established that associate medical expenses – the cost of pharmacy, consumables, implants, medical devices and diagnostics – cannot be subject to the proportionate clause. Insurers are not allowed to apply proportional deductions on ICU charges as well.

On claims

Health policies, sometimes, get rejected on the grounds of non-disclosure of medical issues (by mistake) even though the policyholders would have paid the premium for an extended period. This is because, during the issuance of a policy, many are not aware of certain pre-existing conditions, on the grounds of which the insurers reject claims later. Therefore, the regulator has ruled that health insurers cannot contest claims, citing non-disclosure, by clients who have continued with their policies for eight years. That is, after the expiry of moratorium period (the period of eight years during which the policyholders have continuously renewed their policy) no health claim shall be contestable, except for proven fraud and permanent exclusions specified in the policy contract. Policies would, however, be subject to all limits, sub-limits, co-payments, and deductibles based on the policy contract.

Other major changes

Generally, people with serious illnesses such as Alzheimer’s and epilepsy were not given coverage at all under a health policy previously. Insurers now have to provide individuals with such diseases, coverage for at least other diseases (specifying pre-existing conditions such as Alzheimer’s and epilepsy as permanent exclusions).

Also, the scope of coverage of health insurance policy is widened to provide cover for various illness including behaviour and neuro development disorders, genetic diseases and disorders and cover for puberty and menopause-related disorder. This was previously not covered by all insurers. Modern treatments too will be covered by a health policy including deep brain simulation, oral chemotherapy, robotic surgeries and stem cell therapy.

Waiting period (time period an insured has to wait before the insurer provides coverages) related to a specific disease has been standardised as well. While the standard waiting period is for 30 days, the disease-specific waiting period varies with each insurer, usually 2-4 years; for older policies, it went to over four years as well. The regulator has said that disease-specific waiting period cannot exceed four years. Similarly, the waiting period for lifestyle-related illnesses such as hypertension, diabetes and cardiac conditions cannot exceed 90 days.

Now, policyholders can pay their health insurance premiums in instalment in addition to lump-sum payments. Another change is that insurers have been advised to allow claim settlement for telemedicine consultation.

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Readers’ Comments – The Hindu BusinessLine

Personal Finance

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This is in the context of the article titled ‘Hexaware Delisting: Next steps for shareholders who bid higher than delisting price’ that appeared on BusinessLine website on September 25. Can shareholders of Hexaware, who had bid at a price higher than the exit price tender at the exit price notified by the company?

Gagandeep Gujral

Our response: Yes. Shareholders who had bid higher can tender their shares at the exit price notified by Hexaware. This has to be done by contacting the registrar to the issue — KFintech — within a year from the date of completion of the delisting process. This date will be notified by Hexaware in a public announcement. The registrar will ask for certain procedures to be completed, and also some documents.

Once this is done, the shareholders who had bid at a higher price than the exit price will be paid the amount against the shares they hold.

The podcast on ‘What should investors in multi-cap funds do now?’ that appeared on BusinessLine website on October 2 was informative. Podcasts, in general, are becoming an increasingly popular mode of providing content. Looking forward to hearing more.

Shreela Roy

The article titled ‘Decode your payslip to get more from your salary’ that appeared on BusinessLine website on October 4, is a wonderful topic. It would be of great use, especially, for new graduates getting a job, if BusinessLine could make a video or presentation on the same.

Meera Siva

This is regardingthe article ‘Cement stocks revive despite near-term weakness in demand’ that appeared in BusinessLine on October 5. If cement stocks are buoyant, it is an indication that economic fundamentals are gaining momentum. These are good signs of recovery from Covid-related slowdown.

Amit Kumar

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The dream home dilemma – The Hindu BusinessLine

Personal Finance

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Alka and Shobhit Mehra, aged 43, live in Mumbai. Shobhit has risen to become the head of the risk solutions group at a consulting firm, while Alka is an acclaimed fiction writer. Their son Rahul (13) and daughter Meera (10) study at a premier international school.

Alka has set her heart on a recently constructed apartment building in the premium Bandra (West) suburb, which has a four-bedroom sea-facing apartment that will cost ₹10 crore. The Mehras can’t expect more than ₹4 crore from the sale of their existing house.

The move will mean wiping clean their accumulated portfolio which is currently worth ₹3 crore (all in equity and balanced funds) and taking a home loan of another ₹3 crore.

Shobhit’s take-home pay after deductions works out to ₹6 lakh per month which pays for their monthly expenses of ₹2 lakh, their annual international vacation that typically costs ₹8 lakh and annual school fees of ₹8 lakh per child per annum.

 

Until last year, Shobhit was servicing EMIs on their Santacruz apartment, which took up another ₹ 1.5 lakh per month. He finally became debt-free only recently and is uncomfortable about taking on a large home loan at this stage in his career.

His annual bonus (₹25-30 lakh pre-tax in the last two years) is what he has been investing in recent years.

Alka’s earnings as a writer have been erratic. Her income-tax returns in recent years show a wide range of professional income — from ₹21 lakh to ₹1.08 crore per annum.

Difference of opinion

Shobhit’s view is that they should be saving up for their children’s overseas higher education and wedding expenses, and for their own retirement.

Alka’s view is that Shobhit is denying his family the lifestyle that she believes they deserve and can afford. He still has a good 20 years of work left in him and so does she.

On her part, Alka is willing to be less erratic with her writing commitments — if it means extra income to pay down a home loan for a house she yearns for. Shobhit believes that hoping for a mercurial income stream to suddenly become steady and strong borders on wishful thinking.

Here’s the advice we gave Shobhit and Alka.

Assumptions

But first the assumptions. The rate of inflation is 10 per cent per annum for education, wedding expenses and cost of living.

The rate of return per annum is 15 per cent from equity, 7 per cent from debt, 5 per cent from gold and 10 per cent from real estate. The retirement age of Shobhit and Alka is 60 years and their life expectancy is 85 years.

The higher education fees is ₹30 lakh each year for graduation (four years) and ₹60 lakh each year for post-graduation (two years). The wedding expense is ₹50 lakh per child. Shobhit’s and Alka’s incomes are assumed to increase annually by 10 per cent and 6 per cent, respectively.

Based on the above assumptions, the likely expenses towards various goals are as given in the accompanying table.

Recommendations

So, here’s what we recommended based on the two case scenarios — one, don’t buy the new house, and two, buy the new house.

Case 1: Don’t buy new house

Their current portfolio is 100 per cent in equity. It is recommended to diversify the portfolio by investing in different asset classes so that risk may be minimised. The recommended portfolio is 70 per cent equity, 20 per cent debt, 5 per cent gold and 5 per cent real estate. The expected weighted average return from recommended portfolio is 12 per cent per annum with the deviation of +/- 9.45 per cent, assuming 10+ years of holding period. The expected weighted average returns on a more conservative corpus post-retirement is 9 per cent per annum.

Three years before the occurrence of any financial goal, the pre-decided amount will be shifted from the recommended portfolio to a liquid/short-term debt fund. Seventy per cent of the yearly savings will be invested in the diversified portfolio.

Shobhit should purchase a term insurance cover of ₹7 crore and Alka should purchase a cover of ₹3 crore. They should also purchase a health insurance cover of ₹20 lakh with a critical illness rider of ₹20 lakh.

They should also maintain an emergency corpus of ₹25 lakh at all times. This emergency fund is recommended to be invested in either liquid or ultra-short term debt funds and can be used for any unplanned expenses. Given the above, all the financial goals of the family can be met.

Case 2: Buy the new house

The EMI for the new flat will be ₹2,93,344. Annual savings will come down by almost 50 per cent. Since the existing mutual funds will be used to finance the house, the available provisions will come down to nil. The revised insurance cover required will be ₹16 crore. In this case, Shobit has to either depend on his employee for extra insurance cover or take an additional life insurance cover.

Unlike in the previous case, the emergency corpus can be reserved only for either medical emergencies or EMIs in case of job loss or unplanned events.

It is assumed that 70 per cent of annual savings are invested in the recommended portfolio every year till Shobhit and Alka turn 60.

If the couple purchases the house by taking a loan, there is a high probability that they may run out of their retirement corpus by the time they turn 70 year of age. Excluding retirement planning, all other financial goals of the Mehra family are achievable even if the couple decides to buy the property.

If all the goals are to be met, Alka is required to increase her annual post tax income to ₹81 lakh, maintaining a constant increment of at least 6 per cent per annum. If Alka’s increase in income does not increase to this level, the new property could be used to get regular income by opting for reverse mortgage when they turn 65 years of age. This should cover the deficit in the retirement corpus.

The writer is CEO and MD of TrustPlutus Wealth Managers (India)

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What is Tax Collection at Source (TCS)? Here’s a primer

Personal Finance

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There are certain new tax collection at source (TCS) rules that came into force from October 1, 2020 under the Income Tax Act 1961. While many of these provisions relate to goods and services, there are some that directly impact individuals. Before we get into how these provisions impact you, let us understand the ‘what’ and ‘how’ of TCS.

What is TCS?

Tax collection at source is the Income Tax Department’s way of sifting out certain high-value transactions under section 206C of the Income Tax Act. Transactions such as purchase of car for an amount exceeding ₹10 lakh, foreign currency remittances, and sale of goods above ₹50 lakh, among others, come under the ambit of TCS provisions.

How is TCS collected?

TCS is calculated on transactions beyond a certain threshold. Once these transactions breach that threshold, TCS is calculated on the value of the transaction. This amount is added to the transaction value and collected from the buyer or service recipient by the seller or service provider.

If the TCS to be collected is 1 per cent of a car purchased worth ₹15 lakh, then the TCS amount would be ₹15,000. You will have to pay ₹15,15,000 to the car dealer you have purchased the vehicle from.

The TCS amount will be recorded against the Permanent Account Number or PAN of the income tax assessee. This amount will be knocked off against the income tax liability of the assessee, if any, for the financial year in which the TCS was collected. Essentially, your tax outgo will reduce by the amount of TCS just like it does with tax deducted at source (TDS).

Changes from October 2020

The new amendments to the TCS provisions are relevant for those who make purchases in foreign currency, foreign currency remittances, purchase of an overseas tour package in foreign currency from a foreign tour operator, and invest in shares abroad. All these come under Reserve Bank of India’s Liberalised Remittance Scheme (LRS) that allows Indians to remit up to $2,50,000 a year abroad.

From October 1, 2020, while making purchases in foreign currency online through your debit card, credit card, or through online banking, tax will be collected at source by your bank or credit card company at 5 per cent of the value of the transaction on amounts exceeding ₹7 lakh a year. This is over and above any transaction fees that might be collected by the bank or credit card company. In case such aggregate purchases in a financial year are above ₹7 lakh, then TCS provisions will apply to the amount in excess of ₹7 lakh. This limit will be applied for transactions undertaken with an individual bank or credit card company.

For example, if you have made purchases online worth ₹15 lakh, then the TCS will not be applicable till the aggregate purchases cross ₹7 lakh. For each purchase above ₹7 lakh, TCS will be applicable. In case you have made three purchases above the threshold of ₹3 lakh, ₹3 lakh, and ₹2 lakh, then TCS on these transactions will be ₹15,000, ₹15,000 and ₹10,000. These TCS amounts will be billed to your account or credit card statement.

Then there is remittance of foreign currency for the purpose of education. The threshold for TCS applicability remains the same (above ₹7 lakh) and the rate of TCS is 5 per cent of the amount exceeding ₹7 lakh. However, there is a difference in the rate of TCS for foreign remittance for education purposes made by obtaining a loan and one made from own funds. TCS on foreign currency remittances above ₹7 lakh made for education by obtaining a loan (proofs will be demanded by the bank) will be at 0.5 per cent.

Investors who make investment in shares abroad by using the LRS will also be covered by the new TCS provisions. While making investments in shares abroad, the aggregate foreign remittance amount exceeding ₹7 lakh will be liable to TCS. The intermediary that allows you to make such investments will charge you the TCS once the total investment exceeds ₹7 lakh in a financial year.

Any other foreign currency remittance made under LRS will also be covered by the TCS provisions and the threshold limits of ₹7 lakh will apply. The TCS will be collected at 5 per cent of the value of remittance above ₹7 lakh.

For financial year 2020-21, the calculation of aggregate foreign currency remittance above ₹7 lakh will be considered from October 1, 2020 onwards only, and not for the entire financial year. From April 1, 2021 onwards, the TCS provisions will apply for the full financial year.

In case of a foreign currency remittance made for purchase of overseas tour package, there is no threshold limit of aggregate remittances of ₹7 lakh. Any such foreign currency remittance for purchase of an overseas tour package will be liable for TCS of 5 per cent.

In case the remitter of foreign exchange does not produce PAN, or the bank account does not have the PAN registered against it, TCS will be calculated at 10 per cent of the remittance amount.

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How good is Bajaj Finance’s Single Maturity Scheme?

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Taking cues from the systematic investment plans (SIPs) of mutual funds, Bajaj Finance launched a new FD product earlier this year — the Systematic Deposit Plan (SDP).

We reviewed the product in January this year (tinyurl.com/SDPBaj). Bajaj Finance has now launched a variant of SDP, with a ‘Single Maturity’ option.

We take a look at whether this new feature makes the cut as a worthy investment.

Recap

The SDP essentially allows a person to make regular investments, a minimum of ₹5,000 every month. Each monthly investment is treated as a separate deposit, with tenures of each deposit being 12-60 months, at the choice of the investor. In addition, investors can opt for the number of monthly deposits, ranging from six to 48.

 

All deposits under SDP are cumulative deposits, implying that the interest will be paid on maturity only. The SDP essentially helps create a laddering effect due to different FDs under SDP maturing on different dates.

The change is that this product introduced in January is now called ‘Monthly Maturity Scheme’. Alongside,the company has launched a new variant, the ‘Single Maturity Scheme’. Here, customers will receive the maturity proceeds of all the FDs created systematically, as a lump sum, in a single day. Under the Single Maturity Scheme, one can deposit for tenures between 24 and 60 months. The number of deposits (beyond the first deposit) one can opt for varies from six additional deposits to 36, depending on the tenure.

Customers opting for a tenure of 24 months (minimum tenure under Single Maturity Scheme) will be required to make six additional deposits under the SDP (after the initial deposit). For SDP of higher tenure, say, 36 months, customers can opt to pay either six or 12 additional deposits. Similarly, for a 48-month tenure, one can opt to pay six, 12 or 24 additional deposits, and for a 60-month tenure, the options available are six, 12, 24 or 36 additional deposits.

The tenure of each deposit (instalment), after the first deposit, will gradually reduce such that all of them mature on a single date. Say, you opt for a single maturity scheme of 36-month tenure and opt for six additional deposits — your first deposit will have a maturity of 36 months. The second deposit will mature in 35 months, and third/fourth/fifth/sixth/seventh deposit will mature in 34/33/32/31/30 months, respectively.

Under this scheme, every deposit will fetch interest, according to the prevailing rate of interest on the date of deposit and for the respective tenure.

Worth it or not?

Post the recent revision in rates, Bajaj Finance offers interest rates of 6.9-7.1 per cent for (cumulative) deposits ranging 12-60 months.

Customers who apply online and senior citizens get an additional interest rate of 0.1 per cent and 0.25 per cent, respectively. The company’s deposits are rated AAA.

While the rates offered by Bajaj Finance are higher than most public sector banks, a few private banks —IndusInd Bank and RBL Bank, for instance — offer rates that are 10-15 basis points (bps) higher than those offered by Bajaj Finance currently. Small finance banks offer 10-25 bps higher rates, across tenures.

That said, investing in SDP, whether single maturity or multiple maturities, may make sense only in a rising-rate scenario.

If the company revises its interest rates at regular intervals, successive instalments will be locked into higher rates.

However, if you want to maximise the interest earned, deciding the number of systematic deposits and the tenure of the instalments beforehand can be a difficult task.

The new variant of SDP — single maturity scheme — can be somewhat similar to a recurring deposit (RD). But the difference is that in an RD the interest rate is constant throughout the tenure (flexi RDs may pay out higher interest on the stepped-up amount). Also, in an RD, you are required to contribute every successive month.

Under the single maturity scheme, you don’t contribute for all the months of the tenure. You can choose the number of months you want to contribute.

In a traditional RD, banks generally charge a penalty —in the form of lowered interest rate —in the event of a delay in or non-payment of an instalment.

No such penalty applies in the case of the SDP. Delaying a month’s SDP instalment only alters the tenure of that deposit (in the case of single maturity scheme) or pushes your maturity date for that instalment further (monthly maturity scheme).

You also have the flexibility to stop investing or restart after a gap with a new ECS (electronic clearing service) mandate.

If you have a steady cash inflow which you wish to keep reinvested, this product could be an option apart from RDs.

Otherwise, it is suitable for those who cannot keep a regular watch on interest rates in the market and the rates offered by different entities.

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