Investors should take precautions and invest no more than 20 per cent of their corpus in fixed income investments
Indian investment scenario offers multitude of investment avenues to meet the diverse requirement of its investors. Among other things being equal, these investment options can differ from each other on their returns, maturity period and the risk taking capacity of the investors. However, there is a direct relationship between risk and return — the higher the risk involved, the higher the returns to be expected. Investors who aspire for higher returns have to bear a high level of risk, which is evident from investments made in the highly volatile stock market.
As far as the time aspect of the investment is concerned, there are financial instruments, which are short-term in nature and these include savings bank accounts, money market or liquid funds, and fixed deposits with banks. On the other hand, there are some financial instruments which offer a long-term horizon for investment. These include post office savings, public provident fund (PPF), company fixed deposits, bonds, and mutual funds.
Small savings schemes in India are framed and enacted by the Union Government under the Government Savings Bank Act, 1873, and Government Savings Certificate Act, 1959. The reason for the establishment of small savings schemes after Independence was to provide safe and simple investment opportunities to the lower and middle income groups and these schemes were channelised and administered by Government institutions such as post offices and nationalised banks, with the aim of promoting savings habit and providing safe investment avenues to people with limited income and savings potential. With the same objective, the PPF was established in 1968 for individuals to save for their investments.
There are various schemes offered by the Government through post offices across the country. These schemes include post-office savings account, post-office recurring deposit account, post-office time deposit account, post-office monthly income account, post-office public provident fund account, Kisan Vikas Patra, National Savings Certificate (NSC), and Senior Citizens Savings Scheme. The maturity period of these schemes varies from very short as in the case of a savings deposit to over 15 years as in the case of PPF. However, all these investment options come under the same risk class as all of them have fixed returns. The returns vary between schemes based on their features and maturity period. These schemes are operated through about 160,000 post offices across the country. The PPF scheme is also operated through more than 8000 branches of public sector banks.
With interest rates increasing by 40 basis points in September for the October-December quarter, PPF, the popular tax saving product, has become all the more attractive and will now fetch eight per cent per annum from the initial 7.6 per cent. And the best part of this long-term investment is the tax-exempted maturity amounts in addition to the tax benefits under Section 80C of the Income Tax Act. Therefore, if an investor is in the 30 per cent tax bracket, the returns from PPF would be around 10.4 per cent a year after the new rates become effective from October 1. Investments in the NSC, which comes in two fixed maturity periods — five years and 10 years, has also become attractive after the latest interest rate hike to eight per cent annual return. Although investments of up to Rs 1.5 lakh in the scheme can earn a tax break under Section 80C, the returns are taxable.
The second highest interest rate is now being paid for Sukanya Samriddhi Scheme, a new scheme to save for the girl child with an interest rate of 8.5 per cent per annum as against the existing interest rate of 8.1 per cent with the benefit of tax deduction under Section 80C. Kisan Vikas Patra, an instrument that doubles the investment in a given tenure also witnessed rise in interest rate to 7.7 per cent per annum, which means money invested in it will now get doubled six months sooner.
After the recent interest rate increase, these post office schemes are even better than the fixed deposits offered by banks. In addition, for investors with a slightly higher risk appetite, companies are also offering higher rates for their deposits to garner savings. So, is it a right time to invest in the above long-term investments? Experts feel that the interest rates are likely to move up further in the next few months. So, it is advised that risk-averse investors to wait for few months to lock in their money for long-term investments. However, investors with a comparatively higher risk appetite can invest in company FDs instead of bank FDs. However, one should take precaution and invest no more than 20 per cent of the corpus into these fixed income investments.
(The writer is Assistant Professor, Amity University
