A good portion of the financial assets of individual is held in the form of non-marketable financial assets like bank deposits, post office deposits company deposits, and provident fund deposits. A distinguishing feature of these assets is that they represent personal transactions between the investor and the issuer. For example, when you open a savings bank account at a bank you deal with the bank personally. In contrast when you buy equity shares in the stock market you do not know who the seller is and you do not care. The important non-marketable financial assets held by investors are briefly described below.
Perhaps the simplest of investment avenues opening a bank account and de-positioning money in it, one can make a bank deposit. There are various kinds of bank accounts: current accounts, savings account and fixed deposit account. While a deposit in a current account does not earn any interest, deposits in other kinds of bank accounts earn interest. The important features of bank deposits are as follows:
1. Deposits in scheduled banks are very safe because of the regulations of the Reserve Bank of India and the guarantee provided by the Deposit Insurance Corporation, which guarantees deposits up to Rs 100,000 per depositor of a bank.
2. There is a ceiling on the interest rate payable on deposits in the savings account.
3. The interest rate on fixed deposits varies with the term of the deposit. In general, it is lower for fixed deposits of shorter term and higher for fixed deposits of longer term.
4. If the deposit is less than 90 days, the interest is paid on maturity; otherwise it is paid quarterly.
5. Bank deposits enjoy exceptionally high liquidity. They can be enchased prematurely by incurring a small penalty.
6. Loans can be raised against bank deposits
7. Most banks calculate interest on the minimum deposit between the 10th and the last date of the month. So the best way maximize returns on your savings account is to treat it like a current account between the 1st and the 10th and a fixed deposit for the rest of the month.
Post Office Time Deposits (POTD)
Similar to fixed deposits if commercial banks, POTDs have features:
1. Deposits can be made in multiples of Rs 50 without any limit.
2. The interest rates on POTDs are in general slightly higher than those on bank deposits.
3. The interest is calculated half yearly and paid annually.
4. No withdrawal is permitted for up to six months.
5. After six months, withdrawals are permitted. However, on withdrawals made between six months and one year, no interest is payable. On withdrawal after one year, but before the term of deposit, interest is paid for the period the deposit has been held, subject to a penal deduction of 2 percent.
6. A POTD account can be pledged
7. Deposits in 10 years to 15 years Post Office cumulative Time Deposit Account can be deducted before computing the taxable income under Secion80C.
Monthly Income Scheme of the Post Office (MISPO):
A popular scheme of the post office, the MISPO is meant to provide regular monthly income the depositors. The salient features of the scheme are as follows:
1. The term of the scheme is 6 years.
2. The minimum amount of investment is Rs 1,000. The maximum investment can be Rs 300,000 in a single account or Rs 600,000 in a joint account.
3. The interest rate is 8.0 percent payable monthly A bonus of 10 percent is payable on maturity
4. There is no tax deduction at source.
5. There is a facility of premature withdrawal after one year, with 5 percent deduction before 3 years.
Kisan Vikas Patra (KVP):
Scheme of the post office, the Kisan Vikas Patra has the following features:
1. The minimum amount of investment is Rs.1,000. There is no maximum limit.
2. The investment doubles in 8 years and 7 months. Hence the compound interest rate works out to 8.4 percent.
3. There is no tax deduction at source.
4. KVPs can be pledged as a collateral security for raising loans
5. There is a withdrawal facility after 2½ years.
National Savings Certificate:
Issued at post offices, the National Saving Certificate offers the following features:
1. It comes in denomination of Rs 100, Rs 500, Rs 1,000 , Rs 5,000 and Rs 10,000
2. It has a term of 6 years. Over this period Rs 100 becomes Rs 160.1. Hence the compound rate of return works out to 8.16 percent
3. Investment in NSC can be deducted before computing the taxable income under Section 80C.
4. There is no tax deduction at source
5. It can be pledged as collateral for raising loans.