SAFE INVESTMENT PLANS
In this article we are outlining various schemes available in India for safe investment.
Debt instruments protect the investorâ€™s capital, therefore the importance of a solid debt portfolio. This not only gives stability, but also offers optimal returns, liquidity and tax benefits.
A common mistake while making an asset allocation is to overlook the contributions made to provident fund, insurance endowment plans and public provident fund. These investments are also in the debt part of a portfolio, making it debt heavy.
Good for short-term goals are liquid funds, floating rate funds and short-term bank deposits as options for this category of investment. Liquid funds have returned around 5 per cent post-tax returns as compared to 5.6 per cent post-tax one-year 8 per cent bank fixed deposit returns.
Funds available for investment for over a period of one year then it is better to go in for bank deposits. However, liquid funds are better, if time horizon is less than one year say around six months. This is because the bank deposit rates decrease proportionately with lower periods, while liquid funds will yield the same annualized return for any period of time. Short-term floating rate funds can be considered at par to liquid funds for short-term investments.
Fixed Maturity Plans (FMP)
If the investor knows exactly for how much time he can invest the available surplus a smarter option is to invest in FMP. They are short-tenured debt schemes that buy and hold securities till maturity, thereby eliminating the interest rate risk. Try and opt for FMP that offer a double indexation benefit
Fund houses usually launch double indexation FMP during the end of the financial year so that they cover two financial year closings.
Fund houses launch FMP through out the year that yields attractive returns. Investorâ€™s Mutual funds agent can keep the investor informed when such FMP is launched to tap the market.
Other options of investing are FMP plus schemes like Franklin Templeton Fixed Tenure Fund or HDFC Multiple Yield Fund which return with a small equity flavor. These work on the same principle but invest about 70 to 85 percent in debt and the 15 to 30% in equities.
The debt component is held till maturity and accumulates to reach the original investment the returns are quicker because of active equity management. One such scheme launched 2 years ago has returned 16 per cent since inception.
Long-term & Medium options:
These options typically offer low or virtually no liquidity. They are, however, largely useful as income accumulation tools because of the assured interest rates they offer. These instruments should find place in long-term debt portfolio.
Employee Provident Fund:
PF will also be counted as debt component which can be maximized to 20 per cent of the investorâ€™s 9employeeâ€™s) basic salary, the company contributes another 12 per cent. This contribution will yield a return of 8 per cent and will be eligible for tax benefits.
Public Provident Fund:
It offers a return of 8 per cent per annum, lasts for 15 years and is still exempt at all stages from tax. However, it doesn’t score too well on liquidity. PPF is a great investment if one is younger or middle aged so that the returns can be maximized taking the benefit of extending the period of holding.
National Savings Certificate:
NSC is another attractive instrument offering a return of 8 per cent. While the interest component gets accrued and it is returned along with the principal only on maturity.
Although NSC has a relatively lower tenure of six years, liquidity aspect is negative. The only incentive is that the accrued investment is automatically reinvested, and qualifies for tax benefits.
Kisan Vikas Patra (KVP):
The schemeâ€™s tenure is of eight years and seven months, over which the money doubles. Liquidity in KVP is available any time after about two and half years from the investment date, but a loss of interest has to be borne on premature liquidation. Investments in KVP don’t qualify for tax benefits and the interest earned is also fully taxable. Investing in KVP is recommended if one has some spare cash after investing in other tax-saving schemes.
Post Office Time and Recurring Deposits (POTD):
Available for periods ranging from 1 to 5 years and with the interest rates ranging from 6.25 to 7.5 percent, these are good for liquidity. One can exit a POTD within six months of starting one without receiving any interest and if withdrawn after one year then 2 percentage points are deducted. But there are no tax benefits.
These are flexible, liquid and offer good interest rates today. Make use of the two-in-one savings accounts that banks offer that is surplus over a specified sum is transferred to a deposit which yield a higher return on the money accumulating in the investorâ€™s savings account.
Post Office Monthly Income Scheme:
This scheme provides a monthly income at an interest rate of 8 per cent. It has a maturity period of six years. This instrument has become less attractive after the 10 per cent maturity bonus and the tax benefit were taken away. More suitable for retirees who are looking for regular and assured returns.
Senior Citizens Savings Scheme:
Citizens of 60 years in age or above 55 years and voluntarily retired can avail the scheme. The upper limit for investment is Rs 15 lakh. SCS offers a return of 9 per cent, making it a compelling proposition for the senior citizen. The tenure is five years and can be extended by another three years. Liquidity is available after one year but it proves costly, as there is a penalty of 1.5 per cent of the amount deposited. No tax benefits and now there is a need to pay Tax at Source.
All the above schemes mostly help investors who have served as employees during their active working life and the resultant savings from the above schemes suiting their needs can augment their post retirement incomes. For that matter even businessmen can create additional income from their surplus funds so that they are taken care during their bad financial times.