Personal Investments

Investment in small savings schemes floated by the government to invest hard earned money without any pre-checking is no longer true. The interest rates on these schemes are now linked to the government bond yields. An investor will need to assess the future movement of interest rates before committing money to these options. It is a drastic shift that transforms these fixed income options into market-linked products.

The PPF will earn 25 basis points (100 basis points =1%) above the 10 year bond yield. The Senior Citizen’s Savings Scheme will earn 100 basis points higher than the yield of 5 year government bonds, while NSCs will fetch an interest of 8.4%. Powered by the magic of compounding this higher rate can translate into big gains.

The revision in interest rates is a bonanza for investors. The shift to market linked returns coincides with government bond yields hitting three year high levels. If the government bonds yields continue to remain at the current high levels till the cut offs date in April 2012, investors in long term options, such as the PPF, NSC, and the Senior citizens Saving Scheme, can expect a return of more than 9% in the next financial year.

However, market linked return is a double edged sword and the rate could also fall to below 8%. In the past 12 years the 10 year yield has fluctuated between over 10% and below 6%. Investors are not sure how the transition to market linked returns will impact them. A fixed return is important for senior citizens who depend solely on the income from investments.

Public Provident Fund (PPF)

This all-time favourite will earn 8.6% this year. The biggest gainers will be investors who have already accumulated a large corpus of Rupees 15-18 lakh over the past 10-12 years and could expect higher returns in the next 1-2 years before the rate cycle turns.

Another important change has been the raising of the PPF investment limit from Rupees 70,000 a year to Rs 1 lakh. This makes the PPF a good tool for retirement planning. If we take into account the tax saved, the return is as high as 12.65% for taxpayers with an annual income of over Rupees 8 lakh. Of course, these projections assume that the interest rate will remain at 8.6% throughout the tenure. It is expected that the interest rate cycle is close to topping out and rates could move down after 2-3 quarters.

National savings certificates (NSCs)

There was a time when post offices were crowded with taxpayers wanting to buy NSCs before the end of the financial year. But the aura of the NSC diminished when agents found more lucrative options and investors got the same tax deduction but a higher rate from bank fixed deposits. Now, the government hopes to revive interest in this one time bestseller by hiking the interest rate to 8.4% and improving the liquidity by reducing the tenure from 6 years to 5 years.

10 year NSC

This is a new instrument and will have an attractive spread of 50 basis points above the 10 year bond yield. The rate for this year is 8.7%. However, since the NSC income is taxable, this option is not as good as the PPF. Invest in it after you exhaust the Rupees 1 lakh annual limit in the PPF and still want the safety of a government scheme.

Senior Citizens Savings Scheme (SCSS) Post office MIS

The generous spread of 100 basis points above the 5 year bond yield given to the SCSS is a bonus for retirees in times of high inflation. This year (2011-12) they will get 9%, but their returns could be higher if the bond yields don’t decline. However, bank fixed deposits are a better alternative because of the higher returns they offer to investors above 60 years. Also, there is no limit on the investment whereas you cannot invest more than Rupees 15 lakh in the SCSS.

The cost of exiting the SCSS is lower than the penalty levied by banks for foreclosing a fixed deposit. If you withdraw from the scheme after one year, the penalty is 1.5%. After two years this gets reduced to 1%. In case of fixed deposits, it can be up to 2% of the amount. The SCSS is also attractive from a taxpayer’s standpoint. Investments are eligible for Section 80C benefits though this could change under DTC.

Another favourite option of retirees has been marginalized in the revamp. The post office monthly income scheme will earn a marginally higher rate of 8.2% but the 5% bonus on maturity has been scrapped.

Time deposits and savings account

Your post office savings account would also fetch you a slightly higher interest rate – from 3.5% earlier to 4% now. The RBI’s decision to deregulate the interest rates on savings bank accounts has already started a rate war among banks. Some private banks like Kotak Bank, Induslnd and YES Bank are offering higher rates of 5.5% on savings bank deposits of up to Rupees 1 lakh and a higher rate of 6% for balances beyond that. The only thing going for the post office bank is that the interest of up to Rupees 3,500 a year is tax free. In case of joint accounts, this tax free limit is Rupees 7000. Besides, the post office requires a low minimum balance of Rupees 500/- compared with Rupees 5000-10,000 in a bank.

But the short comings far outweigh these benefits. One has to personally visit the post office for operating the account because it does not have ATMs or Net banking facility.

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