Monday, May 23, 2005

Starting Simple : Small savings reviewed

For the individual investor there are basically the following options for small savings or secure savings. They are

  1. RBI Bonds (Currently 8% taxable returns)

  2. Post office monthly income scheme (8% taxable monthly income + 10% maturity bonus)

  3. Voluntary provident fund (currently 9.5% non-taxable)

  4. Public provident fund (currently 8% tax free)

So if you think about it, the first two options are not really that good for a simple reason. They are taxable returns. For people in the highest tax bracket, that means 30% of the returns are gone poof. Thus the 8% really means 5.6% effective returns and the POMIS with the trick involving the POMIS and RD supposedly gives a return of 11%. This would still be 7.7% post tax return. Thus the real race is between the VPF and PPF. Currently the VPF's 9.5% tax free return is absolutely unbeatable. So there you go folks, the absolute winner is VPF. Go ahead and have a quick chat with your payroll department. Ask them to post a large chunk of your pay back into the VPF and you are rest assured that the money is earning 9.5% returns.

So what is the downside you ask? Provident funds are illiquid instruments - i.e. you really cannot get to your money if you want it in a hurry. VPF especially can be accessed only under some special circumstances such as building a home or children's education etc..., So there you go, park some of that surplus cash in a VPF before it reaches your purse.

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