Tuesday, January 4, 2022

Where to invest money safely for long term

Many consider Post Office is the safest means to invest for a risk free long term return. But post office has various schemes to invest and one would wonder in which scheme to invest considering the various aspects in it. These schemes from post office are fixed return instruments. Would see more variable return instruments for long term later in this post. 

As of 1st Jan 2022, the interest rates in Popular schemes of Post Office are as follows

Scheme Name

Interest Rate(%) from 1st Jan 2022

Interest would be paid

Lock-In period

Tenure

Taxable/Non taxable

Public Provident Fund(PPF)

7.1

Annually

5 years

15 years

Non Taxable

Kisan Vikas Patra

6.9

Annually

 

10 years

Taxable

5 year National Saving Certificate(NSC)

6.8

Annually

5 years

5 years

Non Taxable

5 year Monthly Income Scheme(MIS)

6.6

Monthly

 

5 years

Taxable

5 year Recurring Deposit

5.8

Quarterly

 

5 years

Taxable


As you can see above, clear winner would be Public Provident Fund(PPF) as the investment amount is non taxable during investment under 80C. The interest earned in it is non taxable and the maturity amount would be non taxable as well. 


To consider the benefit of non taxability, let us consider an example.

Let us say you are in a 30% tax slab and invest the 10,000 in some other instrument giving you 8% return annually. 

So, interest income after 1st year would be 800 Rs. 

Deduct 30% tax on this interest income i.e 240 Rs. 

So, your net income from the instrument would be 560 which gives you 5.6% !


If you have invested the same 10,000 in PPF, your income after 1st year would be

710 Rs(with 7.1% interest rate which is present since last couple of years and current year)

You would also realize the tax benefit of 3000 Rs here under 80C ! So, net gain would be 710Rs+3000Rs of Unrealized tax gain ! Even if you don't want not consider the total gain as 3710 as you might have covered the 1.5 lakhs of tax exemption with some other instrument already, you can walk away with 710 of tax free returns.

Some people think that re-investment of returns from one-scheme is beneficial instead of investing in one scheme. Let us consider one example as a reality check as well. 

Let us say you have invested 1 Lakh Rupees in MIS scheme. You would get 6600 Rs Annually which would be 550 Rs per month. Let us say you invest that in RD. With 5.8% returns, you would getting 382.8 Rs as interest income(considering only simple interest for 6600 and not considering the CAGR for the monthly investment). So, your total return per year would be 6982.8. So, your overall returns would be 6.983%. Here you need to consider the effect of tax as well which is 30%(say). Then your tax would be 2094.84. So, your net return for the year would be 4887.96. Which would be 4.89 % ! If you consider compound interest for 550 Rs at 5.8% for 12 months, effective returns at the end of the year is 211 Rs(much lower than simple interest i calculated above). So, overall return(before tax) is 6811 which is 6.81%. So, if you are not in the tax bracket, then only you can go for re-investment option instead of NSC which gives 6.8%

If you are in a tax bracket of even 10%, NSC is the better option over MIS+RD as it gives 6.8% return(post tax). 


why MIS is still popular ? : 

MIS is still popular because it gives you regular stream of income on monthly basis. Here you can invest for a maximum of sum of 4.5 lakhs or 9 lakhs as a joint account. Considering 4.5 lakhs as single account holder, you can gain 29,700 per year or 2475 per month as interest income. But if you are not planning to use that income and invest it again, then go for PPF itself as it gives better returns and tax benefits as well as updated earlier.


How about investment in G-Secs which are even safer ? 

Many consider investing in Government Securities(G-Sec)Bonds which are even safer ? At the current interest rates, G Sec bonds maturing in 2026 or 2031 are not giving returns higher than 6%. The interest income is taxable in your tax bracket, say 10%,30%. It would also need the investor to have a demat account which might not be the case for a normal investor. 


How about investment in VPF(Voluntary Provident Fund) ? 

VPF provides 8.5% returns annually which is tax free as well. But the catch is you need to wait till your retirement or 2 months of un-employment or some emergencies like COVID to withdraw the VPF amount. One should be salaried employee to contribute to VPF scheme which is backed by central government. If you are planning to save money for your retirement in a safest means without much risks, go for VPF. 


What about ELSS(Equity Linked Savings Schemes) ? 

ELSS schemes are a popular option among young investors nowadays as it gives returns based on share market and tax benefit under 80C as well. It has lock-in period of only 3 years compared to 5 years or more of other investments.  The returns after 3 years are tax free unless your returns are greater than 1 lakh. Returns greater than 1 lakh are taxable under Long Term Capital Gain(LTCG) at 10% with indexation benefits(considering the effect of inflation at 6% per year). i.e if your returns are 1,50,000 after 3 years and you want to withdraw it, you need not pay 5,000 Rs for the 50,000 here. It would be much lesser because of indexation benefits.  So, If you are willing to take some risks and gain better returns, you can go in this route. 


How about APY(Atan Pension Yojana) and NPS(National Pension Scheme)

You can also enrol for Atal Pensio Yojana to get a monthly pension of 1,000 or 2,000 or upto 5,000 by investing a fixed amount in Atal Pension Yojana. How much money you need to contribute per year till retirement depends on your current age. Let us say you are at 31st Age, contribution would be around 7400. You can calculate the exact contribution here  In which schemes the APY invests is not very clear right now.

National Pension Scheme(NPS) is one more scheme related to Pension. You can invest any amount say 1,000 multiple times a year which would be invested in share market. You can choose various pension schemes from various providers like HDFC< Aditya Birla etc. You can take aggressive route i.e maximu of 75% of your investment is invested in shares or conservative route i.e only 25% is invested in shares. You can take hybrid route as well where any portion between these is chosen. Both NPS and APY provide benefits under section 80CCD which is in addition to 1.5 lakhs under 80C.  Some companies allow upto 10% of basis salary contribution by employer for NPS. This provides additional deduction under 80CCD 2. But the catch with NPS, APY is that you can't touch this money until you retire. 

So, based on your risk profile(the amount of risk you are willing to take), you can choose either PPF/VPF/ELSS/APY/NPS or a combination of these for a long term tax free return. 


why not in Gold? 

Many people consider investment in Gold is safest considering the ever increasing rate of Gold. But Even gold prices have seen depreciation recently(from 55k to around 44k now). But instead of investing in real gold in the form of ornaments and paying making charges+ GST, people prefer buying Secure Gold Bonds(SGB) issued by Govt of India which have a tenure of 8 years. here Govt would issue the bond at the current market price and purchase the bond at the market price after 8 years. Govt would also pay you interest of 2.5% per year here. But the catch is the interest is taxable at your tax slab and total capital gain after 8 years is taxable at LTCG with indexation. You can also redeem it after 5 years. It needs a demat account as well. But there is a uncertainty over gold price here. 


why not invest in shares directly ? 

People often argue that why not invest in shares directly and get better returns than all of these and gain Long Term Capital Gain benefits as well ? Mutual Funds for ELSS , APY , NPS are run by different fund houses like HDFC, SBI etc and have associated charges like expense ratio, fund maintenance charges etc . If you need to invest in Shares, you need to have your own demat account which would have its own annual maintenance charge, account opening charge, transaction charge, commission per trade to be paid to demat service provider, depository charges etc. So, detailed comparison Direct investment in shares v/s Fixed income instruments like PPF/VPF/APY or variable income instrument like ELSS/NPS is beyond the scope of this article. Let us try to cover that in our next article.  


P.S: I am not an investment advisor and this post is not intended to advertise in investing in one way or other. It is intended for educational purpose only and provide you better comparison of various instruments to take a better call for your future. Please do further research from your end about the pros-cons of each scheme you are planning to invest and your investment goal before investing. Happy investing. 


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