We all know about the risks associated with investing in Stock Markets and thus prefer to stay away from the same. We also know that Real Estate is always a good investment option but requires a large chunk of cash to be deployed at the time of purchase.
With Stocks and Real Estate not being the preferred option of many due to their inherent limitations, Fixed Income plans have always been a hit in India. They not only offer safe returns but also suit the pocket of every investor.
When we talk about Fixed Income Plans, the first thing that comes to mind is Bank Fixed Deposits. We all are aware about the characteristics of Bank Fixed Deposits, so in this article I’ll try to dig deep into 3 popular Fixed Income Plans in India except Bank Fixed Deposits
I. Public Provident Fund
II. Corporate Fixed Deposits
III. Senior Citizens Saving Schemes
Public Provident Fund
Public Provident Fund was launched by the Govt to encourage the habit of savings amongst Indians and to deposit these savings with the Govt. at a time when the Indian Govt. didn’t have much reserves of its own.
- The interest rate offered on PPF Account is 8% and is compounded annually. The scheme is Exempt-Exempt-Exempt (EEE), i.e., the principal invested, interest earned and maturity amount are all tax free.
- The investment can be claimed as deduction under Section 80C of the Income Tax Act making it more lucrative.
- The PPF Account can be opened with a minimum of Rs 100, with the minimum deposit being Rs. 500 p.a.
- It has a maturity period of 15 years and can be extended for a period of 5 years.
- The maximum deposit is limited to Rs. 70,000/ year.
- The loan against PPF is restricted to 25% of the balance in your account at the end of the 2nd year immediately preceding the year in which the loan is applied for.
- The number of instalments is also restricted to 12 per year.
- Interest is always calculated on the 5th and the last day of the month.
- Premature Closure is possible only in case of Death.
Tips while investing in PPF
By depositing money in your PPF Account between the 1st and the 5th of the month, you can earn interest for that month as well. In case you want to use this Investment to avail loans, interest on Loans against PPF account is charged at 2% above the PPF Rate, which works out to 10%. This is very low as compared to the Interest Rates on Personal Loans offered by Banks.
Corporate Fixed Deposits
The Interest offered on Corporate Fixed Deposits are more than the returns offered on Bank Fixed Deposits as they are more riskier than Bank Fixed Deposits and usually they offer 1-2% extra interest as compared to Bank Fixed Deposits.
The following points should be kept in mind while investing in Corporate Fixed Deposits:-
- Company Financials – Companies that pay regular dividends and have a healthy debt-to-asset ratio should be considered. Also avoid loss making firms
- Ratings: – Always invest in company deposits that have ratings of AA or higher. And keep a track of the deposits during the deposit period as ratings are reviewed and revised on a continuous basis.
- Choose Wisely: – Financial agents often push company deposits as they get a higher commission for selling company deposits. Don’t invest on their insistence and prefer to do your own research while investing in Corporate Fixed Deposits
- Premature Closure:- Unlike Bank Fixed Deposits wherein the facility of Premature Withdrawal is available, many Companies don’t extent the facility of Premature Closure and it is highly advisable to check the Prospectus for the terms and conditions related to Premature Closure of the Deposit
- Prefer to invest in short term deposits: – As Corporate Fixed Deposits are slightly risky, it is always advisable to invest for a shorter duration like 3 to 5 years. Investing for larger periods like 10 to 15 years is not advisable as you never know what the condition of the company would be after such a long period
Senior Citizens Saving Scheme
If you are a senior citizen above the age of 60 years, you can also invest in the Senior Citizens Saving Scheme. For those who have taken voluntary retirement, the age eligibility is 55 years. However, if you have retired from armed forces, there is no age restriction.
- The minimum investment is a reasonable Rs. 1000 and you can make additional investments in multiples of Rs. 1000. The maximum investment limit is fixed at Rs. 15 Lakhs.
- The current interest rate offered is 9% which is more than the interest offered on post office schemes. It has a maturity period of 5 years but can be extended by another 3 years.
- Interest Payout is done on a quarterly basis.
- Premature Withdrawal is also possible after the completion of 1 year but you’ve to pay a penalty for the same. For withdrawal after 2 years, the penalty is 1% and for withdrawals before the completion of 2 years – the penalty is 1.5%
- Investments in this account are also eligible for deductions u/s 80C up to the specified limits of Rs 1 Lakh p.a.
- Interest Income from this source is taxable and if the interest receivable during the year exceeds Rs. 10,000, TDS would also be deducted on the same
- Those who have taken voluntary retirement and are between the age of 55 and 60 years can only invest the retirement benefits.
Debt Instruments have always been a useful tool to boost up your portfolio, provided you examine each instrument carefully on its merits and demerits, and invest accordingly.
While investing in Fixed Income Plans, an investor should always keep in mind that the promise of high returns by any instrument is not necessarily the best reason to be investing in it. Other factors like Tax benefits, Option for Premature Withdrawal, and Riskiness of the Investment should also be considered while making any investment.
As a thumb rule, also try to diversify your investments as this will not only help you reap benefits of all options available but will also minimise the risks associated with each option.