Assured Return Schemes: Opportunity beckons
Apr 07, 2004

Author: PersonalFN Content & Research Team

Tax-planning season is over, investors are done with their tax-saving investments and not many would consider investing in government savings schemes at this time of the year. However financial year 2004-05 has presented investors with a rather unique opportunity. Generally the budget is promulgated every year in the month of February; changes in rates of government savings schemes (if any) are announced therein.

With the budget being postponed until the post-elections period, rates on small savings schemes have been left unchanged. So investors have been granted a grace period to fortify their portfolio with additional instruments at the present rates. Would such a move be a prudent one? Let's find out.

Government savings schemes offer returns which are substantially higher than market rates. However the soft interest rate regime has taken its toll on these schemes as well, albeit to a limited extent. For example, deposits in Public Provident Fund (PPF) which offered 12% in the year 2000, now offer 8%. Similarly National Savings Certificate (NSC) has experienced sharp rate cuts from 11% in 2001 to slightly over 8% at present. Logically a rationalisation in the rates offered by government schemes should be on the cards (our view is that the assured return could be reduced later this calendar year). Making investments in assured returns schemes like the NSC, Kisan Vikas Patra (KVP) or Post Office Monthly Income Scheme (POMIS) will give investors the chance to lock-in these attractive returns, something which would not have been possible otherwise.

But there is a flipside to this prospect, government savings schemes enjoy their abundant popularity on account of two factors i.e. attractive returns and tax benefits. There could be changes in tax laws, benefits etc which will be known to investors only after the budget is announced. If the tax benefits on these instruments are watered down, the same will be applicable to investors. Hence it could be a case of combining attractive returns from the past with present day tax benefits.

The uncertainty surrounding the tax benefits can make your choice a difficult one. Investors can take a call on the same, based on their investment objective. If you are an investor who invests in government schemes purely from the tax savings perspective, it would be a prudent move to wait for the budget, be aware of the tax laws and then allocate your investments accordingly.

Conversely for investors with a low risk appetite, who invest in assured returns schemes for the stated purpose, this is an opportunity to be capitalised.

Track your investments in government savings schemes using the MyPlanner. For further information, click here.