Saving And Investment Schemes

Earlier in this module, we learned about savings and investments. We have also discussed the pros and cons for each of them. In this unit, let us discuss a few savings and investments schemes available to us. 

What are various Long-term and Short-term Saving Schemes?

• Kisan Vikash Patra: A savings scheme that is available at all Head Post Offices and Authorized Post Offices throughout India. Investments in KVP can be in denominations of ₹1,000. Any savings in the KVP will double the amount invested in 10 years and 4 months. The Interest rate offered is 6.90% (As of June, 2021) per annum compounded annually. Premature encashment is available only at a discount. However, this instrument offers no tax savings like the PPF and NSC.
   
• Public Provident Fund: A savings instrument with a long-term horizon having a maturity period of 15 years and an interest rate of 7.10% compounded annually (As of Q1 2021-22). A PPF account can be opened through a nationalized bank anytime during a year and is open all through the year for depositing the money. There is a tax benefit available on the amount invested and also the interest that gets accrued every year. A withdrawal is permissible every year from the seventh financial year of the date of opening the account and the amount of withdrawal will be limited to 50 percent of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower. However, with the recent changes in PPF rules, one can prematurely close his PPF account after completion of 5 years of opening the account but, premature closure is allowed only under specified conditions.
   
• Company Fixed Deposits: These are short term (6 months) to medium term (3-5 years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 6-10% per annum for company FD's. The interest is received after deduction of tax.
   
• National Savings Certificate (NSC's): These are issued by the Department of Post, Government of India and are available at all post offices in the country. 

The minimum amount that can be invested is INR 100, and in multiples thereof. There is no upper limit for investment in this scheme. Certificates are issued in the denomination of ₹100 for a maturity period of 5 years. The certificates are also transferable. The interest rate offered is 6.80% compounded annually which the government revises every quarter. The interest that is earned through NSC is taxable under the slab ‘Income from other sources. The interest that is earned each year in the scheme is reinvested every year. The amount that is re-invested each year attracts tax benefits under Section 80C. Since the maturity period of NSC is five years, the interest can be re-invested  for only four years. The interest earned in the fifth year is paid to the investor with the maturity amount. So, the tax benefit can be availed only for the first four years of the investment period. The interest earned in the final year is taxable.

• Bonds: It is a fixed income instrument issued with the intent of raising capital through debt. The Government and Financial Institutions alike sell bonds. A bond is defined as a promise to pay back the principal along with a fixed rate of coupon payments on a specified date mentioned in the bond itself.
   
• Mutual Funds: A mutual fund is a professionally managed fund that creates a pool of capital by raising money from the public and invests in a group of assets (stocks, bonds, money market instruments, etc). It is a proxy to investment for people who have no knowledge of how the financial system operates and want a professional to manage their money on their behalf. Investment in mutual funds is done through units which are calculated based on the Net Asset Value (NAV) of the fund which is determined at the end of every trading session. Mutual funds are of two categories viz open ended and closed end mutual funds. Investment can be done for a specified horizon based on the investor’s needs.

• Equity/Share: The paid-up equity capital of a company is divided into equal units of small denominations; each called a share. For example, in a company, the total equity capital of Rs 2 crore is divided into 20 lakh units of Rs 10 each. Each such unit is called a share. Thus, the company then is said to have 20 lakh shares of Rs 10 each. The holders of these shares are owners of the company and have voting rights.

• Debt Instrument: It represents a contract wherein one party lends money to another on a pre-determined basis with regards to rate and periodicity of interest, repayment of principal amount by borrower to the lender. In the Indian Securities market, the use of debt instruments issued by Central & State Governments and public sector organizations and the term 'debenture' is used for instruments issued by corporate sector.

• Derivatives: Derivative is a product where in a contract is made based on the value of an underlying asset. It is not something tangible but just a contract. It is a financial contract where the value of the contract is interlinked with the future price movements of the underlying asset. The underlying asset can be equity, commodity, index, bond or any other asset. 

Derivatives were initially introduced as hedging devices and to protect against the fluctuation in spot prices in the market but since then have gained popularity among market participants.

The interest rates of all small saving schemes (post office schemes) like NSC, PPF and KVP are reset on a quarterly basis by the Government of India.