Small Saving Schemes
Sometimes it’s okay to listen to your dad’s advice on savings. He did get it right. Of course stock markets then were opaque establishments, inflation would rarely throw home budgets into a fit, mutual funds were unknown and the friendly neighbourhood uncle who would turn up at your home every year for a cheque would be your dad’s trusted insurance advisor.
You might roll your eyes over a suggestion to park your money in a post office savings scheme or gold but investing small amounts in instruments like these do help in building a decent corpus for the long term. Even though we now live in a different financial world, the fundamentals of prudent investing have not changed. We are not saying you should totally rely on them but they do come in handy when you are starting out and looking for a decent, long-term corpus. Let’s decode a few small savings options.
Post office savings schemes
Now if you want an investment avenue which is safe and secure, gets you good returns, is not into equities and is totally risk free, then head straight to the post office. Finance minister Arun Jaitley has put life back in small savings by revising interest rates for the schemes offered by the post office.
Here’s what’s on offer:
Insurance cover with National Savings Certificate (NSC): While NSC gives tax benefit under Section 80C, the insurance addition makes it a good scheme.
Kisan Vikas Patra to be brought back: Withdrawn in 2011 over fears of money laundering, this popular instrument was doubling your investment in 8 years and seven months. The revamped KVP will continue with its earlier tax treatment wherein there was no deduction allowed under Section 80 C.
Raising the bar for PPF: The maximum amount that you can slot under PPF has been upped to Rs 1.5 lakh from Rs 1 lakh. What makes it the pick of the lot is the fact that it comes with Section 80C benefit and the interest earned is tax free.
Apart from keeping your capital safe, most of the small savings schemes offered by the post office qualify for Section 80C tax breaks, which is why you should consider them.
Flipside: Rising inflation and a fiscal deficit can play spoilsport for instruments like PPF and NSC since both trim their rate of return and interest. The fact that most of these savings schemes are linked to the place of investment makes them difficult to switch when you are relocating. Also it is difficult to track your account online because digitization is still in its nascent stage.
Chit funds
This one would make you fret because of all the horror stories associated with it, the latest being the Saradha scandal in West Bengal. But despite its drawbacks, chit funds are enduring. After all, it’s a personal loan and recurring deposit rolled into one. A costly but convenient loan, chit funds give your money a sense of discipline.
Let’s understand how they work:
Suppose 20 members contribute Rs 1,000 every month for a chit fund, this is how it stacks up
[table id=27 /]
Flipside: Not all chit funds are registered. So if a member defaults, there is no legal way to get the money back. Because there is poor regulation, discount bids can be rigged. Also chit funds give out the pot to only one person at a time.The kitty after the members contribute will be of Rs 20,000. Suppose a member bids for Rs 16,200*, the remaining Rs 3,800 will be distributed among members, bringing down their contribution next month to Rs 810. The discount bid becomes a profit for the chit fund. The bidder gets the money he badly needs after the commission and the members get to pay a lower sum than the original amount (Rs 1,000) agreed upon. Returns from chit funds depend on the level of desperation of other members in the fund to borrow money — the higher the discount bid, the better is the return people make.
Systematic Investment Plans
It’s smart, hassle-free, disciplines investing, makes your dad proud and doesn’t leave you feeling old fashioned about your money. A systematic investment plan (SIP) gives you the luxury of investing smaller amounts over a regular investment horizon. For those getting income on a monthly basis, monthly regular investments is a good option. It helps you accumulate good amount of money. The best part, you can even choose to invest as little as Rs 500 a month via an SIP.
If you love the stock market, then SIP through it. Here’s how Rs 5,000 invested per month in BSE-200 would grow if you take the SIP route
[table id=28 /]Flipside: You can’t sell the units they way you bought them unless you go for a systematic withdrawal plan. Selling is also a complication if half of the SIPs are long term and the rest are short-term gains. Having said that, SIPs still remain best picks because of their hassle-free nature.So basically if you had invested Rs 5,000 in 1994 in the market, the current value comes up to Rs 63,61,821 with a 14% return. Now that’s a magical figure. If you love equity and you want to stay in for a long term then SIPs are the best picks. Not only do they ride the volatility of the stock market, they also reduce the risk by rupee cost averaging.
Going for gold
Not just your dad but even your mom would agree. Gold has always been perceived as the currency in times of crisis. Our fondness for this safe metal has only grown over the years, which is why it is a safe defensive bet against the vagaries of inflation. Gold prices have grown more than 16% annually in the last five years, which is way above the average inflation of 10.4% (consumer price index).
So basically it’s safe but is it good? Let’s take a look
Flipside: It’s at best as an inflation hedge but not as a growth asset because it lags behind other assets such as equity. Physical gold carries storage charges and then there is issue of purity. Not just that, if you sell gold within three years of investing, be prepared to pay more tax with capital gains.
Traditional life insurance policies are another popular investment choice that most fathers advice. While endowment or money-back policies do have their upsides, if you seen from investment perspective now they only serve suboptimal hope for the next 15-20 years.
However, there is nothing wrong following your dad’s rules. After all, they are time tested and work, especially when you are starting out. All one needs is to create a balance in one’s portfolio, which should be enough to keep you and your dad happy.