In times of financial volatility, it is erroneous to depend only on one's income to pay all expenses and create savings for the future. It is time to examine investment and savings alternatives so that one may create a secure financial future for the family.
One can look at monthly investment plans and monthly saving plans. However, it is important to understand what they are.
Monthly investment plans
Also known as monthly income plans since they provide periodic, monthly returns on investment, these are primarily debt mutual funds that provide steady income. The returns fall under the tax savings bracket of the portfolio and they beat inflation. The invested money is locked in for a period of at least three years.
The features of monthly investment plans are as follows:
- The money is invested in this manner: A larger component (up to 80%) in Government securities and corporate bonds, and the remainder in equity markets.
- With a lock-in period of three years, these plans offer excellent indexation benefits. You get profit by way of interest income.
- The returns are computed basis the inflation and price rise at the time. This results in increase in your tax savings limit. In a stable market, annualised returns may be in the range of 11% and above.
- They provide relatively low risk returns that are higher than those from traditional instruments like fixed deposits. They are excellent options for novice investors who are not well versed with the workings of the equity markets.
Monthly saving plans
These are small schemes for individual investors who are looking to create a good corpus for the future. The money is deployed in such instruments as post office saving schemes, Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and National Savings Certificate (NSC), among others.
The features of monthly saving plans are as follows:
- They provide a safe investment instrument for the general public to grow a savings fund. The accumulated corpus can meanwhile be used to mobilise resources for nation building.
- Most monthly saving plans are operated from the country's post offices, while such schemes as PPF are operationalised by nationalised banks and some private banks in India. Only a few public sector banks operate deposit accounts for retiring employees.
- The returns are on monthly saving plans are quite attractive: PPF gets 8.5% interest, for example. The larger the fund of money invested, the higher the returns.
- The returns are predictable, since the rate of interest on them remains constant throughout the deposit term. This is an excellent feature in a stable market, but it does not beat inflation in a volatile economy.
- Monthly saving plans are also not very liquid. Though the KVP and Post Office schemes allow liquidity after 1.5 years of the deposit, you have to forgo interest and also pay a penalty clause.