Mutual fund, stock market, SIPs are the word of the hour, however, there is still a sizeable amount of people who prefer low return in exchange for the minimum amount of risk. A mutual fund or equity possess a relatively higher amount of risk, which people often tend to get away from, so is parking the money in bank account a good option? The answer is No. There are a lot of investment avenues where, the risk is minimum, in addition to higher liquidity, stable returns and tax benefits too. In addition to the risk, investors who are in their 70’s or close to their retirement age also require investment option to park their savings. However, as a result of retirement, their risk appetite is close to zero. Keeping in view of this background let us check some of the small investment plan options.
1. National Savings Certificate (NSC)
A government of India initiative, which promotes savings to low and mid-income group. NSC can be availed from the nearest post office only in the name of an individual. The return of NSC ranges from 7-9% per annum and come with a fixed maturity period of either 5 years or 10 years. The biggest disadvantage of NSC is its liquidity, as the amount invested can be availed only in exceptional circumstances such as the death of investor or court order. The biggest benefit of NSC is up to Rs. 1.5 lakhs of tax deduction. In addition to that, the interest earned also gets clubbed into the investment and is eligible for tax benefits. This option is highly recommended to investors who are in requirement of tax benefits and low liquidity.
2. Public Provident Fund (PPF)
PPF is just like a bank account, which is to be opened with any nationalized bank eg. SBI, PNB. Unlike every bank account PPF account requires a minimum investment of Rs. 500 every year to keep it active. This option provides the investor with guaranteed returns along with substantial tax benefits. However similar to NSC, PPF also has a higher lock-in period of 15 years, with any withdrawal options postponed until completion of 5 years and subject to certain balance maintained in the account. The government prescribes the interest rates for PPF on 31st March of every year and is paid subsequently, the current interest rates for PPF is 8%. Investors who have retirement fund on their mind can explore this option as all the returns from PPF post maturity are tax-free.
3. Bank fixed deposit/Term deposit
One of the most adored options amongst small and medium-term investor, due to its low risk and guaranteed returns. The interest rates fetched by bank fixed deposit are higher than a bank savings account, with numerous liquidity options as per the needs of investors. The interest rate of the fixed deposit is directly proportionate to the term of fixed deposit. The term of the fixed deposit varies from 7 days to 10 years, where 7 days carries the least interest rate and vice versa. Tax benefits are available under section 80C of the income tax act when invested in Tax saver fixed deposit, which incurs lock-in of funds for 5 years. The returns on bank fixed deposit range from 6-7.25%. Investors in search of high liquidity and guaranteed returns can enjoy this investment option.
4.Post Office Time Deposit Scheme (POTD)
Similar to bank fixed deposit, POTD is an option, an investor can avail at the nearest post office. This investment option is famous amongst rural investors, where banking channels are minimum. The scheme, unlike bank fixed deposit, provides you with only four-term options of 1, 2, 3 & 5 years. The interest rate is higher to a higher period of investment. The interest rate ranges from 6.6% for 1 year to a maximum of 7.4% to five-year tenure. POTD is can be withdrawn within 6 months of investment along with the applicable penalty. The biggest disadvantage of POTD is neither the investment nor the returns are eligible for any tax benefits, which makes the bank FD more profitable avenues. However, investors with a low-income group or who are in no need of tax benefit can avail this option, which gives a slightly better rate of return than bank fixed deposit.
5. Post Office Monthly Income Scheme (POMIS)
Another post office scheme, which provides monthly returns and a low risk to your principal amount. POMIS is an account to be opened in the post office, where a maximum amount in aggregate of Rs. 4.5 lakhs can be invested at once per investor for 5 years. The account thereafter provides a monthly interest post 30 days completion of the investment. The lock-in period is of 1 year, post which a 5% loss will be incurred on the principal amount, hence it is recommended to keep the money until 3 years after which no penalty is levied. The rate of return is revised as per government norms, the current rate of return is 7.7% per annum. One of the discouragements in POMIS is no tax benefit with respect to investment as well as interest earned. POMIS is best suited for investors in search of regular income with easy liquidity and low risk.
6. Senior Citizen Saving Schemes (SCSS)
If POMIS offers you regular monthly returns, SCSS offers monthly returns along with tax savings. SCSS is primarily only for senior citizens i.e people with age of 60 or more. SCSS is again a government of India initiative, where its options are available at all nationalized banks and post offices. The rate of return is very generous at 8.6% per annum with a maximum tenure of 5 years, which can be extended to further 3 years. SCSS is eligible for tax benefit under 80C of the income tax act, up to a maximum amount of Rs. 1.5 lakhs. Premature withdrawal, like POMIS, is eligible to post 1-year completion and attracts a penalty of 1.2% up to 2 years of completion.
Savings made in a savings account are barely useful, hence deploying them inappropriate avenue is very essential. Indian economy provides lots of opportunities for small savings, in addition to that, the government of India is in the process of reforming the small savings options into more profitable, secure and easy procedural aspects.