Assured return schemes have suddenly emerged as the most sought after investment avenues among investors. This is not surprising given the extent to which investors have lost their money in the recent crash in stock markets, properties, derivatives and certain fixed income products; which has ultimately propelled investors to look for safer investment options.

As the name suggests, these schemes offer assured returns i.e. investors know upfront how much return they are going to earn from their investments. Therefore, there is less uncertainty i.e. lower risk associated with investing in such schemes. In this article we put forth a primer on some of the popular assured return schemes.

1. Public Provident Funds (PPF)
PPF is the flavor during tax season. PPF is a 15 year scheme and requires annual subscription to keep the account active. The investments can be in the range of Rs 500 to Rs 70,000 payable either in lump sum or in installments. They earn an interest of 8.0% p.a. compounded annually. Any amount deposited in excess of Rs 70,000 in a year, will not be treated as 'subscription' and shall be returned without any interest. The amount deposited and interest earned is completely exempted from income tax.

2. Bank Fixed Deposits (FD)
FDs are the next best option available to investors. The minimum investment and interest rates on the FDs vary from bank to bank. They are available for various maturities ranging from 15 days to 10 years. However, only investments in 5-Yr FDs are exempted from income tax under Section 80C, however the interest earned on the same is taxable. Interest rates offered by FDs changes from time to time depending on the interest rate scenario in the country. At present, 5-Yr FDs are offering around 8.0% to 8.5% p.a.

3. National Savings Certificates (NSC)
Investments in NSC entail making a lumpsum investment for a 6-Yr period. They earn a return of 8.0% p.a. compounded half-yearly. The minimum investment is Rs 100 and there is no upper limit. Also, investments of upto Rs 1 lakh are exempted under Section 80C of income tax act. Furthermore, the interest accruing annually is deemed to be reinvested, hence it qualifies for deduction under Section 80C. However, the interest income is chargeable to tax.

4. Post Office Time Deposits (POTDs)
POTDs are fixed deposits with post office. Deposits can be made in multiples of Rs 200 with no upper limit. The investments can be made for 1 year, 2 years, 3 years or 5 years. Only investments in 5-Yr deposits are eligible for tax benefits under Section 80C of Income Tax Act subject to an upper limit of Rs 100,000. The interest on 5-Yr deposits is 7.5% p.a. compounded quarterly but paid annually i.e. investment of Rs 10,000 will earn an interest of Rs 771 after one year; the interest earned is taxable.

5. Post Office Monthly Income Scheme (POMIS)
It is a regular income scheme. The minimum investment is Rs 1,500 and the maximum investment can be upto Rs 450,000 in single account and Rs 900,000 in joint account. It pays 8.0% p.a. on a monthly basis and 5.0% bonus on maturity. However, there is no tax benefit on this instrument.

6. Kisan Vikas Patra (KVP)
It requires minimum investment of Rs 100 but there is no upper limit. The amount invested doubles in 8 years and 7 months i.e. interest of 8.41% p.a. compounded annually. KVP do not offer any tax benefits.

7. NABARD Rural Bonds (NRB)
These bonds have a face value of Rs 1,000 each. The minimum investment shall be in five bonds i.e. Rs 5,000 but there is no upper limit. The bond is issued for a period of 5 years. Currently it is offering 8.5% p.a. to individuals and 9.0% p.a. to senior citizens. The interest rates do change from time to time and it is available on the website www.nabard.org. The investments upto Rs 100,000 are exempted from income tax under Section 80C; however the interest earned is taxable.

Asset-allocation benefit
Some of these investment options should always form part of one’s portfolio irrespective of the risk-appetite and the equity market conditions. However, the weightage of these instruments in one’s portfolio can differ from one individual to another depending upon the goals, risk-appetite and time horizon.

Let’s consider two portfolios. Portfolio ‘A’ without these assured return options and Portfolio ‘B’ with these options:

Portfolio A Weightage (a) 1-Yr Return (b) Weighted Returns (a*b) Equity Funds 50% -35% -17.50% Debt Funds 50% 8% 4.00% Total Return of Portfolio -13.50%

Portfolio B Weightage (a) 1-Yr Return (b) Weighted Returns (a*b) Equity Funds 40% -35% -14.00% Debt Funds 30% 8% 2.40% Assured Return Schemes 30% 8% 2.40% Total Return of Portfolio -9.20%

(We have considered 1-Yr average returns of top performing diversified equity funds, 1-Yr average returns of long term debt funds and 1-Yr returns of PPF and FDs for safe investment options over last 12 months.)

The table clearly outlines that asset allocation plays a crucial role in minimising the risk of the portfolio. The loss in one asset class can be compensated by the guaranteed returns delivered by assured return schemes. Hence these schemes should always form a part of not only risk-averse investors’ portfolio but also of risk-taking investors’ portfolio.

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