Money on the markets

A maturing market amid the mayhem

Tax saving with safety locked in

February 27, 2009

pixSome of the best advice often comes from the most unlikely of sources.

Years back, while on a trip to Jaipur, I had run into a rather energetic man who insisted on jumping the queue at the post office. When requests failed, I asked him why he was in a hurry.

“I have a savings account here,” he said proudly in Hindi, clutching a dog-eared booklet with currency notes tucked in. Ram Prasad, the 42-year-old cycle rickshaw driver had his way and left flashing his stained teeth.

Outside, he offered me a discounted tour of the city, with unsolicited advice on why I should park my funds in the post office. The stock market was hot that year and I brushed aside his guidance.

I bumped into him again last year outside the Pink City railway station. He showed me the new auto rickshaw he had bought with years of intelligent investing. Ram Prasad, I realised, had been a winner all these years. The market had gone into a tailspin, eroding millions of rupees of investor money, within months of the global financial crisis unraveling.

Reading the signposts is a must and interpreting them correctly is what can make or break. Singed by the financial crisis and corporate misadventures, small investors scrambled for safe yet decent returns. Suddenly, they had found the silver lining in bank fixed deposits (FDs) and government-backed saving schemes.

Coincidentally, the freeze of credit markets in October has forced banks and corporates to raise money at high rates. Bane for one could be a boon for another. Amid gloomy days, small investors now have a bounty of options to park their hard earned savings in debt offering as high as 10.5 percent.

While bank FDs are safe, those of corporates come with risk of default. Currently, bank FD rates for one year range from 8 percent to 10.5 percent. Though the rates are attractive, taxation and inflation, as always, eat into the gains.

Offering lesser returns but top on safety are short-term, government-backed investment schemes. Be it post office investment plans or bonds, the chances of you losing your money are nil since the government stands guarantee. Post offices offer saving instruments with guaranteed returns of 6.25 percent to 9.0 percent under several schemes. While gains here may not be comparable to the high returns in equities trading or mutual funds when the market is on an upswing, they definitely provide the safety that middle- and low-income group households require.

Most of these saving instruments fall under medium- to long-term plans (five years and above) which, besides offering modest returns, are also useful tools for saving tax. These plans come under Sec 80C, 80CCC or 80D of the Income Tax Act, 1961.

Those under Sec 80C include bank and postal FDs (5-year lock-in), life insurance plans, Public Provident Fund (PPF), National Saving Certificate (NSC), equity-linked savings schemes (ELSS), infrastructure bonds and unit-linked insurance plans (ULIPs). Investments here get deducted, up to Rs 100,000, from the gross total income of a person.

While PPF, which carries a maturity period of 15 years, offers a tax-fee interest rate of 8 percent, NSCs have a lock-in of six years and offer an interest rate of 8 percent (compounded quarterly) with the entire interest being taxable.

Another attractive instrument is the RBI’s Government of India Bonds, which it issues periodically. It carries a five-year maturity period and the interest is tax-free.

Infrastructure bonds, like the RBI bonds, are also issued periodically.

Some others worth mentioning are Life Insurance Corporation’s short-term guaranteed plans and pension plans. Premium for pension plans qualify for rebate under Sec 80C.

These instruments may not offer dream returns, but are definitely a safe bet for investors worried about missing the March 31 deadline for saving tax. What is more important — investing in risky assets and losing sleep, or going for a safe bet? The choice is yours. And if you are unsure, there’s always the World Wide Web to offer comfort.


Well, safety is important.. but I still believe one should buy ELSS funds if they are planning their future.. Equities are going to help the portfolio… but yes.. I agree that some debt component is essential always.

Posted by Ram Gopal Jaikishan | Report as abusive

Guess I need to start investing. Ram Prasad must be owning a fleet of taxis by now.

Posted by Tony | Report as abusive

Tony, if you are young and are planning your married life and kids and retirement start investing in mutual funds.
If you are old and nearing retirement .. invest in safe options ..

Good luck.. hope you become a crorepati soon.

Posted by Ram | Report as abusive

I think a balance of post office / govt. bank based/backed, ELSS funds and Gold (coins which can sold back even though this does not help tax savings) are very good investment options.

And always keep a balanced investment with both risk (high returns) & low risk (low returns) so by this way your gains would even out and you will have fair earnings

That how i am investing for the past 3 1/2 years and i dont loose sleep if my high risk investment’s current year earnings goes down as i making a good earnings in gold this year :-)

- Rajesh


Why not Gold ETFs?
Why are you buying gold coins.. ETFs are safer to hold, easy to invest and sell and more tax efficient as well.

Posted by Anil Chaddha | Report as abusive

it may not be advisable to aggressively invest in Gold, already there is lot of speculation going on there & its downslide may begin sooner than later.

also under the current worldwide economic situation it would be advisable to go heavy on govt backed investment instruments at least in the short term.

all the common logic that you should invest in ELSS if your are young doesnt hold ground….
just imagine if you are young & invested heavily in ELSS & also face job insecurity… you may not have a good chance to live long enough to enjoy your old age…

as they say in the long run everyone is dead… so even youngsters are advised to invest sensibly in safe investment options giving preference to govt backed instruments.

Posted by Kartik | Report as abusive

You are right that gold ETF are easier to trade and safe.
But does it gives you gold when you redeem it? No
The ETF funds are not 100% backed by physical gold. They keep only 20-30% of physical gold. ETF nav is only goverend by gold prices.

What if the fund house managing gold ETF fails? Think of a worst case scenario… Because the fund house does not keep the 100% physical gold of equivalent value of ETF fund. If there is redemption pressure on the fund house, it may not be able to give u back the money?

Bottom line: buy some physical gold also, don’t invest into Gold ETF as a substitute of buying gold

Posted by Praveen Trehan | Report as abusive

There is this general perception that ELSS are meant mostly for young investors who have a long term perspective. This line of thought can be called as Blind Investment. The average return that ELSS can offer in the long term under more than healthy market conditions is never going to be more than 12% p.a. When PPF, Bank deposits, Post Offices, etc. offer guaranteed return of almost 10% annually in the long run by the power of compounding, what else except “greed” motivates us to invest in the Capital Markat.

Posted by Manish Sinha | Report as abusive

Hi! I am falling short of Rs27000 for my 1lac investment u/s 80c. Can someone guide me with best tax saving & high return investment options. I have already invested ICICI life stage RP plan, HDFC standard LIC & LIC. Pls suggest some investment options aprt from these.

I was thinking of investing some amount in Gold ETF & some in ELSS. Pls suggest.

Posted by Rahul Rawat | Report as abusive

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