INVESTMENT ALTERNATIVES
- Rate of return
- Risk
- Marketability/Liquidity
- Tax Shelter
- Convenience
INVESTMENT AVENUES
The various investment avenues available are:- Non- Marketable financial assets
- Equity shares
- Money markets instruments
- Bonds
- Mutual fund schemes
- Life insurance policies
- Real estates
- Precious objects
- Financial derivatives
| - | Return | Risk | Marketability/Liquidity | Tax Shelter | Convenience | |
| Current yield | Capital appreciation | |||||
| Equity shares | Low | High | High | Fairly high | Notax on dividends | High |
| Non-Convertible Debentures | High | Negligible | Low | Average | Nil | High |
| Equity Schemes | Low | High | High | High | No tax on dividends | Very High |
| Debt schemes | High | Low | Low | High | No tax on dividends | Very high |
| Bank deposit | Moderate | Nil | Negligible | High | Section 80L benefit | Very High |
| Public Provident Fund | Nil | High | Nil | Average | Section 88 benefit | Very High |
| Life Insurance Policies | Nil | Moderate | Nil | Average | Section 88 benefit | Very high |
| Residential House | Moderate | Moderate | Negligible | Low | High | Fair |
| Gold And Silver | Nil | Moderate | Average | Average | Nil | Average |
- NON – MARKETABLE FINANCIAL ASSETS:
A good portion of financial assets is represented by non – marketable assets. These can be into the following broad categories –
- Bank deposits
- Post office deposits
- Company deposits
- Provident fund deposits
A distinguishing feature of these assets is that they represent personal transactions between the investors and the issuer. For instance, when you open a savings bank account at a bank, you deal with the bank personally. In contrast, when you buy equity shares in the stock market you don’t know who the seller is and you don’t care for it. The important non – marketable financial assets held by investors are briefly described below: - BANK DEPOSITS:
Perhaps the simplest of investment avenues, opening a bank account and depositing money in it can make a bank deposit. There are various kinds of bank accounts - current account, savings account and fixed deposit account. While a deposit in a current account does not earn any interest, deposit in other kinds of bank accounts earns interest. The various kind of deposits are discussed below: - Saving Account:
Features:A Saving bank account (SB account) is meant to promote the habit of saving among the people. It also facilitates safekeeping of money. In this scheme, fund is allowed to be withdrawn whenever required without any condition. Hence, a savings account is a safe, convenient and affordable way to save your money. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters. Bank also pays you a minimal interest for keeping your money with them. The minimum amount to open an account in a nationalized bank is Rs. 100. If cheque book is also issued, the minimum balance of Rs. 500 has to be maintained. However, in some private or foreign bank the minimum balance is Rs. 500 or more and can be up to Rs.10,000. One cheque book is issued to a customer at a time. A savings account can be opened either individually or jointly with another individual. In a joint account, only the sign of one account holder is needed to write a cheque. But, at the time of closing an account, the sign of the both the account holder is needed.
Advantages:The interest rate of savings bank account in India varies between 2.5% and 4%. In Saving Bank account, bank follows the simple interest method. The rate of interest may change from time to time according to the rules of Reserve Bank of India. One can withdraw his/her money by submitting a cheque in the bank and details of the account, i.e. – the Money deposited and withdrawn along with the dates and the balance is shown /recorded in Pass book. It is much safer to keep your money at a bank than to keep a large amount of cash in your home. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India with regard to several policy and operational parameters. The federal government insures your money. Saving bank does not have any fixed period for deposit. The depositor can withdraw money from his account by issuing a cheque to a concern or for self. Now –a-days, most of the bank provides the facility of ATM card, credit card, debit card, etc. through which the user can withdraw money from ATM centers at any time i.e. – 24 hours a day. One can also avail credit card for shopping where it is accepted. Many of the bank also provide the facility of Internet banking, that is, one can perform the transactions like withdrawals, deposits, statement of accounts through the internet.
- Recurring Deposits:
Features:The recurring deposit in bank is meant for someone who wants to invest a specific sum of money on a monthly basis for a fixed rate of return. At the end, you will get the principal sum as well as the interest earned during that period. The scheme, a systematic way for long term savings, is one of the best investment options for the low income groups. The minimum investment of recurring deposit varies from bank to bank but usually it begins from Rs. 100/-. There is no upper limit in investing. The rate of return varies between 7 and 11 Percent depending on the maturity period and amount invested. The bank calculates the interest quarterly or as specified. The period of maturity ranging from 6 months to 10 months. The deposit shall be paid as monthly installment and each subsequent monthly installment shall be made before the end of the calendar month and shall be equal to the first deposit. In case of default in payment, a default fee is chargeable for delayed deposit at the rate of Rs. 1.50/- for every Rs. 100/- per month for deposits up to 5 years and Rs. 2/- per Rs. 100 in case of longer maturities. Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation if it is more than the rate of return offered by the bank. Worse, lower the gap between the interest rate on a recurring deposits and inflation, lower your real rate of return. Premature withdrawal is also possible but it demands a loss of interest.
Returns:The rate of interest varies between 7 and 11 percent depending on the maturity period and amount invested. The bank calculates the interest quarterly or as specified: Amount invested per month Maturity amt in 2 yrs @ 5% interest Rs. 100 Rs.2626 Rs. 500 Rs. 13,132 Rs. 750 Rs.19,698 Rs. 3000 Rs.78,792
Advantages:Some Nationalized banks are giving more facilities to their customer, say, State bank of India provides Fee Roaming Recurring Deposit facility to their customers. They can transfer their account to any branch of SBI freely. Tax benefit on the interest earned on Recurring Deposit up to Rs. 12000/- . Tax Deductible at source if the interest paid on deposit exceeds Rs. 5000/- per customer, per year, per branch.
- Fixed Deposits:
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit.
Features:Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest), etc. Bank deposits are fairly safer because banks are subject to control of the Reserve bank of India. Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate. The minimum deposit varies with each bank. It can range from as low as Rs.100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-. Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making a single big deposit. In case of any premature withdrawal of partial amount, then only one or two deposits need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to be considered before investing in an FD is the rate of interest and the inflation rate. The inflation rate can simply chip away your real returns.
The rate of interest for Bank Fixed Deposits varies between 4 and 11 percent, depending on the maturity period (duration) of the FD and the amount invested. Interest rate also varies between each bank. A bank FD does not provide regular interest income, but a lump sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The interest payable on fixed deposit can also be transferred to Saving Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 10 years. Duration Interest rate(%)per annum 15 - 30 days 4-7 % 30 -45 days 5-8 % 46 - 90 days 6-8 % 91 - 180 days 6.5-9.5% 181 - 365 days 7-9.5% 1 - 1.5 years 8.5-10.25% 1.5 - 2 years 8.5 - 10.5 2 -3 years 9 -10.5% 3 -5 years 9.5 - 10.5% 5 years 9.5 - 11%
Bank deposits are the safest investment after Post Office Savings because all bank deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India. It is possible to get a loan up to 75 – 90 % of the deposit amount from banks against fixed deposits receipts. The interest charged will be 2% more than the rate of interest earned by the deposit. With effect from A.Y. 1998-99, investment on bank deposits, along with other specified incomes, is exempt from income tax up to a limit of Rs. 12,000/- under section 80L.Also, from A.Y. 1993-94, bank deposits are totally exempt from wealth tax. The 1995 Finance Bill Proposals introduced tax deduction at source (TDS) on fixed deposits on interest incomes of Rs. 5000/- and above per annum.So, in short the important features of bank deposits are as follows:
Deposits in scheduled banks are very safe because of the regulation of the RBI and the guarantee provided by the Deposit insurance Corporation. There is a ceiling on the interest payable on deposit in the savings account. The interest rate on fixed deposits varies with the term of the deposit. In general, it is lower for fixed deposits of shorter term and higher for fixed deposits of longer term. If the deposit is less than 90 days the interest is paid on maturity otherwise it is paid quarterly. Bank deposits enjoy exceptionally high liquidity. They can be encashed prematurely by incurring a small penalty. Loans can be raised against bank deposits. The interest on bank deposits is tax – exempt within certain limits under section 80L of the income tax act.
- Saving Account:
- POST OFFICE DEPOSITS:
- Post office Recurring Deposit Account (RDA):
Features:A Post – Office recurring Deposit Account (RDA) is a banking service offered by Department of post, Government of India at all post office counters in the country. The scheme is meant for investors who want to deposit a fixed amount every month, in order to get a lump sum after five years. The scheme, a systematic way for long term savings, is one of the best investment option for the low – income groups. The minimum investment in a post office RDA is Rs. 10 and then in multiples of Rs. 5/- for a period of five years. There is no prescribed upper limit on your investment. The deposit shall be paid as monthly installments and each subsequent monthly installment shall be made before the end of the calendar month and shall be equal to the first deposit. In case of default in payment, a default fee is chargeable for delayed deposit at 0.20 Paisa per month of delay, for Rs.10 Denomination. After more than four defaults, the account shall be treated as discontinued in case the account is not revived within two months from the fifth default. For advance deposits for 6 months or 12 months, a rebate is allowed at the prescribed rate (For Rs. 10 denomination: - Rs. 1/- for 6 advance deposits, Rs. 4/- for 12 advance deposits.) One withdrawal is allowed after one year of opening a post –office RDA on meeting certain conditions. You can withdraw up to half the balance lying to your credit at an interest charged at 15%. The withdrawal or the loan may be repaid in one lump or in equal monthly installment. Premature closure is allowed on completion of three years from the date of opening and is such case, interest is payable as per the rate applicable for the Post Office Savings Bank Account. After maturity of the account, it can be continued for a further period of 5 years with or without further deposits. During this extended period, the account can be closed at any time.
The post-office recurring deposits offer a fixed rate of interest, currently at 7.5 percent per annum-compounded quarterly. Monthly Investment Total(60 months) Investment Money returned on maturity (after 60 months) 10 600 728.90 20 1200 1457.80 50 3000 3644.50 100 6000 7289.00 500 30000 36445.00 1000 60000 72890.00 1375 82500 100224.00 5000 300000 364450.00 Advantages:
The post office offers a fixed rate of interest unlike banks, which constantly change their recurring deposit interest rates depending on their demand supply position. As the post office is a department of the government of India, it is a safe investment. The principal amount in the Recurring Deposit Account is assured. Moreover, interest earned on this account is exempted from tax as per section 80L of Income Tax Act. Time Deposit:
A Post Office Time Deposit Account (TDA) is banking service similar to a bank Fixed Deposit offered by Department of post, Government of India at all post office counters in the country. The scheme is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of one year to two years, three years and a maximum period of five years. Investors get a lump sum (principal + interest) at the maturity of the deposit. Time Deposits scheme return a lower, but safer, growth in investment.
Features:Time deposits can be made for the periods of 1 year, 2 years, 3 years and 5 years. The minimum investment in a post-office Time deposit is Rs. 200 and then its multiples and there is no prescribed upper limit on your investment. Account may be opened by an individual, Trust, Regimental Fund and Welfare Fund. The account can be closed after 6 months but before one year of opening the account. On such closure the amount invested is returned without interest. 2 year, three year and five year accounts can be closed after one year at a discount. They involve a loss in the interest accrued for the time the account has been in operation. Interest is payable annually but is calculated on a quarterly basis at the prescribed rates. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. One can take a loan against a time deposit with the balance in your account pledged as security for the loan.
This investment option pays annual interest rates between 6.25 and 7.5 percent, compounded quarterly. Time deposit for 1 year offers a coupon rate of 6.25%, 2- year deposit offers an interest of 6.5% and 3 years is 7.25% while a 5-year Time Deposit offers 7.5% return. Duration of Account Quarterly Compound Interest 1 year 6.25% 2 year 6.5% 3 Year 7.25% 5 Year 7.5% In this Scheme your investment grows at a pre-determined rate with no risk involved. With a Government of India-backing, your principal as well as the interest accrued is assured under the scheme. The rate of interest is relatively high compared to the 4.5% annual interest rates provided by banks. Although the amount invested in this scheme is not exempted as per section 88 of Income Tax, the amount of interest earned is tax free under Section 80-L of Income Tax Act. National Saving Certificates:
National Savings Certificates (NSC) is a certificate issued by Department of post office, Government of India and are all available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years.Features:
NSCs are issued in denominations of Rs.100, Rs. 500, Rs. 1000, Rs.5000 and Rs. 10000 for a maturity period of 6 years. There is no prescribed upper limit on investment.
Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One person can be nominated for higher denominations. The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. One can take a loan against the NSC by pledging it to the RBI or a scheduled bank or a co – operative society, a corporation or a government company, a housing finance company approved by the National Housing Bank etc with the permission of the concerned postmaster. Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16 it is possible after the expiry of three years from date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88.
Return:
It is having a high interest rate at 8 % compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A 1000 rupees denomination certificate will increase to Rs. 1601 on completion of 6 years.
Interest rates for the NSC Certificate of Rs.1000 YEAR RATE OF INTEREST 1 Year Rs. 81.60 2 Year Rs. 88.30 3 Year Rs. 95.50 4 Year Rs. 103.30 5 Year Rs. 111.70 6 Year Rs. 120.80
Advantages:
Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 99. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks associated with your investment.Post Office Monthly Income Scheme:
The post-office monthly income scheme (MIS) provides for monthly payment of interest income to investors. It is meant for investors who want to invest a sum amount initially and earn interest on a monthly basis for their livelihood. The MIS is not suitable for an increase in your investment. It is meant to provide a source of regular income on a long-term basis. The scheme is, therefore, more beneficial for retired persons. Only one deposit is available in an account.
Features:
Only individuals can open the account either single or joint (2 or 3). Interest rounded off to nearest rupee i.e. 50 paisa and above will be rounded off to next rupee. The minimum investment in a Post –Office MIS is Rs.1000 for both single and joint accounts. The maximum investment for a single account is Rs. 3 lakh and Rs. 6 lakh for a joint account. The duration of MIS is six years.
Returns:
The post –office MIS gives a return of 8% plus a bonus of 10 per cent on maturity. However, this 10 percent bonus is not available in case of premature withdrawals. The minimum investment in a Post-Office MIS is Rs.1000 for both single and joint accounts. Deposits (Rs.) Monthly Interest Amt returned on maturity 5000 33 5500 10,000 66 11000 50,000 333 55,000 1,00,000 667 1,10,000 2,00,000 1333 2,20,000 3,00,000 2000 3,30,000 6,00,00 4000 6,60,000 Advantages:
Premature closure of the account is permitted any time after the expiry of a period of one year of opening the account. Deduction of an amount equal to 5 percent of the deposit is to be made when the account is prematurely closed. Investors can withdraw money before three years, but at a discount of 5%. Closing of account after three years will not have any deductions. Monthly interest can be automatically credited to savings account provided both the accounts standing at the same post office. The interest income accruing from a post-office MIS is exempt from tax under Section 80L of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt from Wealth Tax.
- Senior Citizen Scheme:
A new saving scheme called “Senior Citizen Savings Scheme” has been notified with the effect from August 2, 2004. The Scheme is for the benefit of senior citizens and maturity period of the deposit will be for five years, extendable by another three years. Initially, the scheme will be available through designated post offices throughout the country.
Features:The minimum investment is Rs.1000 and in multiples of Rs.1000 subject to a maximum of Rs. 15Lakh. Citizens of 60 years of age and above are eligible to invest. Single or joint account (with spouse only) can be opened. Citizens who have retired under a voluntary or a special voluntary retirement scheme and have attained the age of 55 years are also eligible, subject to specified conditions. The deposit will carry an interest of 9 % per annum (taxable). The maturity period of the deposit will be five years, extendable by another three years. Premature withdrawal after a period of one year will be allowed, subject to some deductions. The investments in the scheme will be non-tradable and non-transferrable. However, nomination facility will be available. Non – Residents Indians and Hindu Undivided Families are not eligible to invest in the scheme.
Returns:The deposit will carry an interest of 9% per annum (taxable).
This Scheme is most beneficial to Senior Citizens and provides a high rate of interest as compared to bank interest of 4.5 – 4.75%. Although the interest on the deposit is taxable, the deposits themselves are tax-free. As the post office is a department of the Government of India. It is a safe investment. The principal amount is assured.
- Post office Recurring Deposit Account (RDA):
COMPANY DEPOSITS:
Many companies, large and small, solicit fixed deposits from the public. Fixed deposits mobilized by manufacturing companies are regulated by the company law board and fixed deposits mobilized by finance companies – more precisely non – banking finance companies are regulated by the Reserve Bank of India.The key features of company deposits in India are as follows:- Maturity:
For a manufacturing company, the term of deposits can be one or three years whereas for a finance company the term of deposit may vary between 25 months to five years quantum. A manufacturing can mobilize, by way of fixed deposit, and amount equal to 25 percent of its net worth from the public and additional equal to 10 percent of its worth of from its shareholder. A finance company, however, can mobilize higher amount. - Interest rate:
The maximum interest rate payable on fixed deposit is 15 percent. Subject of this ceiling a company may design its fixed deposit scheme in the way it want. Company may interest annually, quarterly and monthly. Company also offer cumulative deposit scheme under which interest is accumulated and paid at the end. - Security:
Fixed deposit represent unsecured loan taken by the borrowing company. Unlike bank deposits, which are insecure under the Deposit Insurance Scheme up to Rs. 40000 per individual, company deposits are not protected by any insurance scheme. - Credit rating:
Fixed deposits of a company have to be necessarily credit – rated. The fixed deposit rating symbols of CRISIL, the largest credit rating agency in India, are as follows –FAAA – highest safety.
FAA – high safety
FA – adequate safety
F - Inadequate safety
FC – high risk
FD – default - Tax treatment:
The interest on company deposits is fully taxable. Section 80L benefit does not apply to it. For an interest of up to Rs. 2500 per year, companies do not deduct tax at source. There is no deduction of tax at source even if the interest payable exceeds Rs.2500 per year provided the depositor submits form H. - Front end benefit:
Companies compensate brokers by way of commission and reimbursement of expenses. Brokers, in general, share this with the depositors. - Other incentives:
In order to attract deposits, companies offer incentives if the following kind : - Facility for premature withdrawal.
- Free personal accident insurance.
- Scholarship to the ward of depositors.
- Loan facility.
- Preferential allotment in the issue if equity shares and convertible debentures.
- PROVIDENT FUND DEPOSITS:
under process
- EQUITY SHARES
Which is the best RD and what are the interest rates of recurring deposits in banks and in post offices??
ReplyDelete