Frugality is a virtue; it gives birth to small drops of savings. A large capital is nothing but a painstaking accumulation of small drops of savings. Time tested small savings instruments could gather those small savings and morph it into something larger. And any sound financial planning exercise would be incomplete without giving those small savings instruments their due importance.
The three popular frontrunners in this space are the Public Provident Fund (PPF), the National Savings Certificate (NSC) and the recently reborn Kisan Vikas Patra (KVP). Each of these has different characteristics and is suitable to different investment objectives. It can be a tad confusing, on deciding which one to pick. Since all of these have sovereign backing, there is little to worry about credit risk. So, decision making really boils down to four parameters- returns, tenure, liquidity and taxation.
Starting with the NSC, it is available for tenures of 5 and 10 years and currently offers interest rates of 8.5% and 8.8% respectively. These rates are compounded half-yearly, therefore, the effective yield works out at a higher 8.68% and 8.99%. Also, these rates are locked-in for the entire tenure of the certificate, which means even if the interest rates in the economy fluctuate, the rates will not be reset on the certificate you hold. This makes the yield stable throughout the tenure of the investment. Income tax benefits under 80C are also available. Therefore, on the returns and taxation front the NSC scores well, but liquidity is locked in for tenure chosen, and no premature withdrawal is permitted except under stringent conditions like death, court orders etc. However, if one is in need of liquidity, they can be used as collateral to obtain loans. Ronak Morjaria, Certified Financial Planner, says,” NSC is recommended for those who want a very low risk, tax savings investment.”
On the other hand, the recently re-introduced with much fanfare, the KVP, scores higher on liquidity and roughly at par on returns, but taxation is a letdown. KVP was re-introduced by the government in 2014, it double one’s investment in 100 months i.e. 8 years and 4months.
That works out to a yield of approximately 8.67%. On the liquidity front, premature encashment is permitted and can be encashed after 2 and half years and in blocks of six months thereafter. Like the NSC, they can be used to obtain loans. However, on the taxation front, it will not be eligible for 80C benefits, which is a major drawback for taxpayers.
Coming to the PPF, it has the longest tenure of the three, it traverses 15 years. This squarely makes it a long term commitment. A positive of a long tenure product is that it encourages financial discipline by saving money regularly and for a long duration. The previous two schemes don’t have an upper limit, but this one has an upper limit of Rs. 1,50,000/- of investment per year.
This amount needn’t be put at one go and can be broken down into monthly payments. The prevailing rate of interest is 8.7%, but it’s subject to revision from time to time by the government. The liquidity aspect is far lower than the other two – after completing 6 years, only a partial withdrawal is permitted. This product too enjoys the 80C tax benefit.
Shobha Bais, Government Business Department, Union Bank of India, says “for the common man, PPF is a good long term product as he can deposit from a minimum of Rs. 500 to a maximum of Rs. 1,50,000 p.a. with tax benefits and with the option of monthly payments.” She further added,” for maximum benefit the saver should deposit the amount between April 1st and 5th of the financial year as he will get interest for the full year.”
Currently all these products have fairly similar yields, so taxation and tenure play decisive roles in taking an investment call. The PPF with its 15 year tenure is ideally suited for very long term savings, for example, a parent saving for a child’s marriage or education. It encourages long, disciplined savings, enhancing the compounding process and building real capital.
The NSC hits the sweet spot for medium term savings – 5 year tenure, tax benefits and locked-in yields impervious to interest rate gyrations. The KVP though recently launched, loses to the NSC since all the tax benefits are missing. Ronak Morjaria, Certified Financial Planner, advises that in order to choose between the options, time horizon should be the primary and start point to your decision process.
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