In the recent past we have made a case for investors in assured return schemes to opt for investment avenues which grant them maximum liquidity. By doing so investors can achieve a dual objective; i.e. invest in schemes which suit their risk profile and simultaneously position themselves for any uptake in interest rates.Short-term fixed deposits emerged as strong contenders within the abovementioned parameters.
Now let's extend this hypothesis and see how government savings schemes (the more popular version of assured return schemes) fare on the liquidity criteria.
For the purpose of our study let us consider schemes from the government savings arena, wherein the investor can make a one-time investment for a longish horizon. National Savings Certificate, Kisan Vikas Patra, Post Office Monthly Income Scheme, Post Office Time Deposits and the GoI 8 per cent (Taxable) Savings Bonds, 2003 fulfill the above criteria and have been considered for the purpose.
The liquid ones...
| NSC | KVP | POMIS | TD | 8% Bonds | |
| Tenure | 6 yrs | 8 yrs 7 mths | 6 yrs | 5 yrs | 6 yrs |
| Premature encashment | No | Yes | Yes | Yes | No |
| Lock-in period | NA | 2 yrs 6 mths | 1 yr | 6 mths | NA |
| Loss of principal | NA | No | Yes | No | NA |
National Savings Certificate and 8 per cent Savings Bonds fare poorly on the liquidity front. Investments in NSC can be prematurely encashed but only in special circumstances like the investor's death, on order by the court of law etc.
KVP permits investors to liquidate their investments any time after 2.5 years from the investment date. Every Rs 1,000 invested would amount to Rs 1,170.51 during the stipulated tenure implying a compounded return of approximately 6.51 per cent.
On the other hand, POMIS fares better by offering investors an exit option 1-yr from the investment date. However the catch lies in penalty clause. An exit after 1-yr would also entail a loss of 5 per cent of the amount invested. As a result while the investor would not suffer any loss in interest earnings (8 per cent per annum), the loss of principal can be a significant one (especially for investors with high investments). Investors will have to wait for a 3-yr period if they wish to liquidate their holdings without any principal loss.
|
Maturity Period |
Rate of Interest |
|
1 Year |
6.25% |
|
2 Years |
6.50% |
|
3 Years |
7.25% |
|
5 Years |
7.50% |
Finally we have Post Office Time Deposits, wherein investors can exercise the exit option within 6 months without any interest receipt (1-yr lock-in for exit with interest receipt).
However the penalty clause is applicable as per the interest rates offered by the time deposit. A flat penalty of 2 per cent is deducted from the applicable rate. Hence if a 5-yr investor decides to exercise his exit option after completion of a 3-yr period, his interest receipt for the uncompleted tenure in excess of 3 years will be computed at 5.25 per cent (7.25 per cent less 2 per cent).
Post Office Time Deposits, powered by their "no strings attached" exit clause surface as the most lucrative investment options. However from an investor's perspective, returns are of paramount importance. Ideally investors would like to have the best of both worlds i.e. liquidity without compromising on the returns. Now let's see how the three schemes i.e. KVP, POMIS and TD fare on returns front, in case of a premature encashment.
The combo: liquidity and returns
| KVP | POMIS | TD | ||
| Amount invested (Rs) | 10,000 | 10,000 | 10,000 | |
| Completed tenure | ||||
| 1 year | Principal | NA | 9,500 | 10,000 |
| Interest | NA | 800 | 771 | |
| 10,300 | 10,771 | |||
| 2 years | Principal | NA | 9,500 | 10,000 |
| Interest | NA | 1,600 | 1,542 | |
| 11,100 | 11,542 | |||
| 3 years | Principal | 10,000 | 10,000 | 10,000 |
| Interest | 2,080 | 2,400 | 2,313 | |
| 12,080 | 12,400 | 12,313 |
Yet again Time Deposits emerge the winners! An attractive rate of return coupled with a liberal exit clause makes them attractive propositions over the 1-Yr and 2-Yr horizon respectively. They are marginally overshadowed by the POMIS over the 3-Yr period.
For investors with a higher risk appetite, market-linked products like Monthly Income Plans would be the ideal choice as they combine superior returns and high liquidity. However for risk averse investors, Time Deposits are best equipped to bridge the gap between assured returns and liquidity.
