How to get the most out of small savings schemes
Arnav Pandya, 19/12/11 Financial Chronicle
The small savings landscape has changed with the overhaul of the different instruments that are available in the market. While freeing up interest rates by linking them to the interest rate of securities in the debt market is one of the changes involved, there are several other changes that investors will face when they want to make investments over the coming days.
Understanding these changes is a very important part of the entire investment process because the investor needs to know exactly what is available and how he should be going about completing his investments. Here is a look at relevant changes.
Kisan Vikas Patra (KVP): The Kisan Vikas Patra has been an investment instrument that has been in existence for a long time and was also popular. However, a lot of investments in KVP were being made in cash, and, hence, it came to be regarded as an instrument that was being used for hiding wealth.
This instrument, which offered around 8.41 per cent yields for investors, has now been discontinued from December 1, 2011, therefore, investors will no longer be able to buy any additional KVPs for investment requirements. Now, investors will have to choose between the other alternatives that are available for investment.
National Savings Certificate (NSC): There has been a major change in National Savings Certificates. Up until December 1, these were instruments, which paid 8 per cent yield that was compounded half-yearly, giving a yield of 8.16 per cent, with a maturity of six years. Now, the features of this instrument have been changed and the difference will be visible on many fronts.
First, the tenure of the investment has come down with the end result that the six-year instrument will no longer be available, but the time has actually been reduced to five years. The new interest rate on the instrument is 8.40 per cent for the five-year period and the figure will be 8.7 per cent for the 10-year instrument.
Earlier, there was only a single instrument that was available for investment, but, now, there is a longer-term option. Investors now have to make a choice about the time period for which they want to lock in their investment. Investors who do not want any worries on interest rate risks should lock into the longer-period instrument when they expect rates to remain low during the interim period, although, it is very difficult to take a 10-year view on interest rates in such uncertain times.
Monthly Income Plan (MIP): One of the biggest changes will, however, be witnessed in case of the post office Monthly Income Plan. The old plan was discontinued from December 1 and now there is a new plan. Again, this will have multiple implications. In the past, the instrument was operational for six years, but now, this tenure will no longer be valid. New investment tenure will be for five years.
There is another aspect to this investment and this is in the form of a bonus paid at the time of maturity. This was an incentive for the investor to remain invested till the time of maturity because it would enable the investor to get a bonus of 5 per cent. This will no longer be available, so in case, the investor remains invested till the end of five years, there will be no bonus coming in. The only relief is that the interest rate has gone up to 8.2 per cent over the life of the new instrument.
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