How to make use of small-savings schemes ::Business Line

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With interest rates of small-savings schemes now linked to market rates, at least a few of these products will fit your portfolio.

Have the small-savings schemes failed to appeal to you despite the interest rates on them being hiked by the government?

That is not surprising as the interest rates currently offered by banks eclipse small savings rates.

But do not close the door on small-savings schemes. From a mixed group of 10 products — time deposits, recurring deposits, NSC, public provident fund, monthly income and senior citizens' scheme — you will find at least one or two that are a good fit to your portfolio.

Here's how you can blend these schemes into your investment plans.

We suggest the best schemes for your long-term portfolio, income requirements and tax savings.

PPF FOR LONG-TERM WEALTH

If you are a salaried individual, the employees provident fund (EPF) remains among the best savings options available to you for long-term wealth building, especially for retirement.

You can also supplement it with a voluntary contribution, if your company allows it.

If you do not have a voluntary provident fund at office or are self-employed, then the humble public provident fund (PPF) will be the best long-term option for you.

In fact, the PPF may just have got an edge over the employees provident fund, with its interest rates now linked with the 10-year government security rates.

In contrast, interest rate on EPF (other than private-run trusts) is typically declared based on the reserves/surplus that the government can spare.

That simply means it is not linked to market rates.

Towards end 2011-12, for instance, while the PPF offered you an 8.6-per cent interest, the EPF rate was just at 8.25 per cent.

From April 2012 to March 2013, PPF will earn you 8.8 per cent. The rates will be revised next year.

Assuming that you can earn about 8 per cent on an average on your PPF for the next 15 years, Rs 1,00,000 deposited every year will leave you with about Rs 29 lakh at the end of the period. Remember, banks offer no deposit options for 15 years.

But unfortunately, investment in PPF is restricted to Rs 1 lakh a year.

The new 10-year NSC with an 8.9-per cent interest is also a good option to build long-term wealth.

If you avail the initial tax deduction, the effective return will be 12.5 per cent, under the 30-per cent tax bracket. Hence use this to supplement your PPF savings.

FOR MEDIUM-TERM GOALS, IT'S BANK DEPOSITS

What if you have medium-term goals such as buying a car in three years or funding your daughter's education after five years?

None of the small savings schemes seem to be attractive at this juncture. Bank products fare better.

For the coming financial year, a post office RD will provide 8.4 per cent for a five-year monthly deposit.

But most banks offer 8.75-9.25 per cent on recurring deposits or term deposits of a similar period.

(Banks too, like post office RDs, keep the interest rate unchanged for every instalment that you deposit till the maturity period).

If you invest Rs 10,000 a month for five years in a bank RD at 9.25 per cent today, it will fetch you Rs 7.3 lakh on maturity after a 20 per cent tax deduction. That's a post-tax return of 7.8 per cent annually.

Post office time deposits too offer less attractive 8.4 and 8.5 per cent rates for three- and five-year terms and will be subject to tax.

In the above tax bracket, the returns post tax will be only 7.1 per cent annually.

A post office RD or time deposit will thus turn attractive only if bank interest rates fall below 8.5 per cent any time during FY-13.

NSC FOR TAX SAVERS

If you have an appetite for only tax-saving investments and prefer to have your regular investments in other asset classes, then the NSC may provide you superior post-tax returns.

Also, it is one option where those in the 30 per cent tax bracket benefit more.

At the current rate of 8.4 per cent for a five-year NSC, you will get a solid 16 per cent interest rate, if you are in the 30 per cent tax bracket and claim deduction under Section 80C.

The 10-year NSC is also an option, if you can afford to lock-in the investment for that long.

The five-year tax-saving bank deposit will only score second as the interest on deposit is taxable.