Savings schemes back in favour

Savings schemes back in favour
By Bakul Chugan Tongia, ET Bureau

An anonymous author once said: “In the old days, a man who saved was a miser; nowadays, he is a wonder.” This precisely emphasises the way people have changed their perception about money.

At the same time investment patterns have also seen drastic changes in the past few years. Today, only a few of us, would prefer the conventional ways of saving as riskier assets like, equities and related instruments are much more in demand.

Savings schemes offered by the neighbourhood post office, like the National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Monthly Income Scheme (MIS), may not be the talk of the investor-focussed shows on television, but given the volatility of the equity markets and uncertainty with respect to interest rates on bank deposits, the assured returns from these traditional savings vehicles have become appealling once again.

Of the three post office schemes, namely, the NSC, MIS and KVP, tax exemption up to Rs 1 lakh under section 80C of the Income Tax Act is available only to the NSC. The interest earned, however, is taxable for each of the three schemes, as also is in the case of interest earned on bank deposits. It is therefore the returns, and not the 80C benefit, that we would stress upon while comparing these schemes.

Kisan Vikas Patra (KVP)

Though withdrawable after 2 years and 6 months, KVP will fetch the best returns only if held over the maturity period—that is, 8 years and 7 months.

An investment in KVP will double at the end of the maturity period, implying a compounded annual growth rate (CAGR) of 8.4%. However, a withdrawal from KVP before the stipulated tenure would grossly impact the returns.

For instance, withdrawal from KVP on completion of 6 years would earn Rs 5,433 for every Rs 10,000 invested. This is worse than the NSC which returns Rs 6,010 for every Rs 10,000 invested after the maturity period of 6 years. As a matter of fact, even banks, which are currently offering interest rate of 7.5% for over 5 year tenure, compounded quarterly, return about Rs 5,620 for every Rs 10,000 invested.

On the other hand, if held for the entire tenure of 8 years and 7 months, every Rs 10,000 invested in KVP would return Rs 10,000, (double the investment) while a bank deposit, at the current prevailing rates, for the same period, would earn Rs 8,920 and NSC Rs 9,607. (It may however be noted that investment in NSC cannot be extended beyond 6 years). A KVP is thus recommended only if the investor can afford to stay invested till its maturity, otherwise, it is beneficial to choose either the MIS or NSC.


Monthly Income Scheme (MIS)
As the name suggests, this scheme is designed to provide a monthly income for the investors. A lumpsum amount invested today will earn a simple interest of 8% p.a. that will be paid out to the investor each month.

MIS thus loses out on the benefits of periodic compounding of interest and would in fact turn out to be least beneficial of all schemes, including bank deposits if the interest so earned is not utilised efficiently.

To make the most out of the MIS, it is recommended to invest the monthly interest receipts in a Recurring Deposit (RD) of a bank or the post office itself.

While the post office currently offers a 5-year RD account, earning an interest rate of 7.5% p.a. compounded quarterly, banks today are offering rates varying from 6.5% to 7.75% p.a. for RD accounts of more than a 5-year tenure.
And as banks offer RD accounts for periods ranging from 1 to 10 years, investors can easily operate an RD account for 6 years, coinciding with the maturity period of the MIS.

An added advantage to the investors of MIS is a bonus payout of 5% on the initial amount of investment. Thus, an investment of Rs 10,000, today, will fetch a simple interest of Rs 4,800 during the entire tenure of 6 years and an additional bonus of Rs 500 payable upon maturity, taking the total amount to Rs 5300 in 6 years.

If an RD account operates simultaneously, a monthly investment of the interest received from MIS, Rs 67 in this example, in RD would fetch an interest of Rs 1,274 in six years.

An investment of Rs 10,000 in MIS-cum-RD scheme would thus earn Rs 6,574 after 6 years. These returns are higher than not only those of bank deposits, at the prevailing rates, but also those of the NSC.

National Savings Certificate (NSC)

Currently earning an interest of 8% p.a. compounded every six months, NSC is the most popular among the three, given its 80C tax benefit.

However, as far as the returns over a period of six years are concerned, MIS-cum-RD turns out to be a far better bet. Earning Rs 6,010 for every Rs 10,000 invested, the effective CAGR yield on NSC turns out to be 8.16% as against 8.79% in case of MIS-cum-RD.

Thus, if 80C is not the criterion for investing, investors would indeed be better off with an MIS-cum-RD plan rather than an NSC.

SOURCE: THE ECOMONICS TIMES