A Retirement Corpus, Three Advisers and ₹5,000 a Month
Rekha Sengupta, 60, retires next month with ₹9,00,000 from her provident fund and no pension. She needs about ₹5,000 a month for household expenses and wants money ready for her daughter's wedding in four years. Three people advise her. A bank officer offers a three-year fixed deposit at 7.0% a year, with a penalty for premature withdrawal. Her nephew, who trades on a mobile app, says she should put all of it into a small-cap share that doubled last year. An agent offers a 'fully secured' deposit paying 9.5% from a company whose name sounds like a bank; the form shows no credit rating, a five-year lock-in and no premature withdrawal, and he also pushes a new fund's NFO that closes in two days. She asks the branch counsellor to tell her what to do, saying she cannot afford to lose this money.
1. Evaluate each of the three main options on safety, return, liquidity and suitability for Rekha, and identify the specific risks in the 9.5% offer.
Read the worked answer
1. Bank fixed deposit at 7.0%
- Safety: high. Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, so spreading across two banks covers her fully.
- Return: ₹9,00,000 × 7% = ₹63,000 a year gross, about ₹5,250 a month - before tax. After tax at her slab, the net may fall below ₹5,000.
- Liquidity: good, but premature withdrawal carries a penalty and a lower rate.
- Suitability: suitable in principle, but a single three-year FD does not match a four-year goal and locks up the income she needs every month.
2. All the money in one small-cap share Highest return possibility, but a single stock can fall 50% or more and may not recover in four years. Last year's doubling says nothing about next year. This is speculation, not a plan, and unsuitable for money needed for a wedding and monthly expenses.
3. The 9.5% 'secured' deposit
- It is not a bank deposit, so DICGC insurance does not apply. 'Fully secured' is a marketing word until she sees the rating and the charge on assets.
- No credit rating shown: unrated deposits are the highest default risk, and the promised 9.5% is precisely the price of that risk.
- Five-year lock-in with no premature withdrawal is fatal for a four-year goal and for a monthly income need.
- The bank-like name is a deliberate device to borrow trust. Reject.
2. Build a concrete allocation for Rekha. Show the arithmetic that connects ₹9,00,000 to a ₹5,000 monthly need and a wedding in four years, and state honestly whether the numbers work.
Read the worked answer
Step 1 - ring-fence the wedding money ₹3,00,000 needed in four years. At about 7% a year, the amount to set aside today is roughly ₹3,00,000 ÷ 1.31 = ₹2,30,000. Put it in a fixed deposit that matures in four years, or a ladder of 1/2/3/4-year deposits, so it is not disturbed.
Step 2 - reserve an emergency buffer ₹1,00,000 in savings or a liquid fund, accessible within 24 hours. Never invest this in equity.
Step 3 - income from the remaining ₹5,70,000 At 7%: ₹39,900 a year ≈ ₹3,325 a month. Adding the interest not needed from the wedding FD still leaves her short of ₹5,000.
Step 4 - be honest about the gap ₹5,000 a month = ₹60,000 a year, which on ₹9,00,000 is a 6.7% draw. But the same ₹9 lakh cannot both produce the income and be preserved for the wedding - the two goals compete. Realistic choices:
- Use the Senior Citizens' Savings Scheme (about 8.2% at present, quarterly interest, five-year term with premature-closure rules) for the income portion, which lifts monthly interest to roughly ₹3,900–4,000 - closer, but still short.
- Draw about ₹1,000–1,500 a month from principal, accepting that the corpus shrinks.
- Reduce the monthly target, or have the daughter or family contribute to the wedding.
- Take only a small ₹50,000 equity index exposure if she can tolerate a 30% fall; otherwise skip equity entirely.
Conclusion: the honest answer is that the numbers do not fully work at ₹5,000 a month without either a small principal drawdown or a higher-yielding safe option. Say so clearly - do not sell her a plan that quietly fails.
3. List the questions Rekha should ask the agent before signing anything, and the red flags she should walk away from.
Read the worked answer
Questions to ask
- Is this company registered with the RBI or SEBI to accept deposits, and can you show me the registration or licence number?
- What is the credit rating of this deposit, and can I see the rating letter? What happens if the rating is downgraded?
- You say 'fully secured' - secured by which asset, and is there a registered charge I can verify?
- What exactly is the lock-in, what is the premature-withdrawal rule, and what penalty applies?
- For the NFO: what are the expense ratio, exit load and lock-in, and why should I buy a fund with no track record instead of an existing one?
- What will I actually receive after tax, and what documents will I get as proof?
Red flags - walk away
- A name or logo that imitates a bank; an office with no visible address; only a mobile number.
- Pressure to sign today because 'the NFO closes in two days' or 'the rate is only for today'.
- 'Guaranteed 9.5% return' with no rating, no audited balance sheet, no prospectus.
- Anyone asking for a blank cheque, a signed blank form, or her Aadhaar/OTP 'for verification'.
- A promise that the agent will 'manage' the nomination or the maturity proceeds on her behalf.
She should take the documents home, ask the branch counsellor to read them, and never sign at the agent's table. Also check the agent's ARN/registration on the regulator's website before handing over any money.