A N Shanbhag: Money matters

By the time you read this, the Budget will be less than a week away. And depending upon whom you talk to, the tax rates may be slashed, the basic minimum threshold of Rs 50,000 could be raised, the various exemptions/deductions may be eliminated, dividend distribution tax and long-term capital gains tax would no longer be applicable, turnover tax may be introduced and last but not the least, small savings interest rates may be reduced. Or not.

No matter what Dalal Street analysts and other storytellers maintain, it is becoming increasingly difficult to gauge the direction of the market. Interest rates seem to be on the rise after being at an all time low.

However, the adage with interest rates is that either predict a date or a rate but never both. There are so many diverse factors at play that projecting the direction of rates is an exercise in futility.

I want to bring to the notice of the reader that there still are a few instruments out there which are almost a sine qua non in any investor's portfolio, notwithstanding the budget.

For, compared to the market rate, rates on these instruments are high and even if market interest rates were to rise, the differential between the two will reduce. Lets compare and contrast what's on offer and what may suit your taste for now.

Post Office MIS

The Post office Monthly Income Scheme (MIS) today is very attractive. At 8 per cent per annum, with a 10 per cent terminal bonus, the IRR works out to 9.66 per cent per annum even without taking into account the Section 80L benefit of up to Rs 12,000. However, there is a cap of Rs 3 lakh on single accounts and Rs 6 lakh on joint accounts.

National Saving Certificates (NSC)

Downward revisions in interest rates have made NSCs less lucrative over the years. However, at an interest of 8 per cent compounded half yearly, the IRR works out to 8.16 per cent.

Section 88 rebate is available on the principal invested and interest accruing each year (except the last year). Assuming a 15 per cent rate of rebate, the IRR works to as high as 13.67 per cent. Again we have not even taken into account the Section 80L benefit.

Post Office Time Deposits

Post Office Time Deposits (POTD) offer interest rates between 6.25 per cent and 7.50 per cent depending upon the tenure of the deposit. Interest is paid/accrued on a quarterly basis yielding an IRR of 7.71 per cent taking a five-year deposit with interest cumulative option.

PPF

Today, PPF is pure gold. The 8 per cent tax-free rate, with the capital assurance and the tax rebate makes it almost too good to be true. Since the investment outlay is just Rs 70,000 per annum, grab it with both hands.

Admittedly, downward interest rate revisions have been made applicable even to deposits made in the past. However, the tax rebate and the periodic withdrawal facility make this investment difficult to ignore.

GOI Savings Bonds

These come in two flavours:
1. Tax-free bonds with a term of five years. The interest is 6.5 per cent payable half yearly (yielding an IRR of 6.61 per cent).

2. Taxable bonds with a term of six years. The interest is 8 per cent payable half yearly (yielding an IRR of 8.16 per cent).

In a press release dated February 9, 2004, RBI clarified that the bonds will enjoy a tax deduction of up to Rs 15,000 per annum under Section 80L. Also Notification F 4 (10) "" W&M /2003 dated January 13, 2004 declared that tax will not be deducted at source on the interest income earned from investments in 8 per cent Savings (Taxable) Bonds, 2003.

Varishtha Pension Bima Yojana

A much-awaited scheme announced for senior citizens finally saw daylight on July 14, 2003. 'Senior citizen' as defined for the purpose of this Yojana, is a person above the age of 54.5 years (55 years nearest birthday). The declared rate of return is 9 per cent p.a., however the IRR works out to 9.38 per cent.

The pensioner has the option of choosing the periodicity of the pension "" monthly, quarterly, half-yearly and yearly. The monthly pension will start from the month following the payment of the lump sum premium by the citizen. The pension will be paid to the pensioner during his lifetime. The same rule applies to the pensions with differing frequencies.

On the demise of the pensioner, purchase price will be returned to the nominee or the legatee as the case may be. The minimum pension will be Rs 250 and the maximum has been fixed at Rs 2,000 per month.

The ceiling applies to the family as a whole. The family comprises spouse, minor children and dependents. In other words, different persons in the same family can apply but the total pension received by the family should not be above the limit.

Though it was not envisaged earlier, a fair amount of liquidity has now been thankfully provided. Exit option is available after 15 years. Moreover, a loan facility is available to the extent of 75 per cent of purchase price after three years. The scheme is not open to NRIs.

Investment strategy

Therefore, investors have the option of the above assured return instruments with rates ranging from 6.61 per cent to 9.66 per cent to choose from. It is apparent that the monthly income scheme of the post office scores the best on all parameters.

GOI bonds too are very popular especially for retirees. However, it may be pointed out that such bonds cannot be offered as collateral and there are restrictions on premature encashment. Therefore, investment may be done after considering liquidity requirements.

To the extent you do not fall under the income tax bracket, invest in schemes like the Post Office MIS and the 8 per cent Taxable Relief Bond.

If liquidity is not a constraint, then the Varishta Bima Yojna, yielding 9.38 per cent should be the first choice, then the bonds. The last option for those who look for a slightly higher return at the cost of commensurately higher risk is the Monthly Income Plans from the mutual funds.

Moreover, market determined returns, over longer periods of time can possibly exceed returns offered by the other schemes discussed above. MIPs invest between 10 per cent and 30 per cent of their investible corpus in equities and over time may be a lucrative investment option.

If you fall under the tax net, and your Section 80L limit is exhausted, the 6.5 per cent bond is the one to go for. Again here too, MIPs could be considered.

Lastly, invest a small portion (say about 5 per cent) of your funds into equities or diversified equity funds.

The above approach will stand you in good stead notwithstanding the budget being positive or not.

The author may be contacted at anshanbhag@yahoo.com.