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Small savings: Bonanza in store!

July 08, 2004 15:58 IST

The Finance Minister didn't disappoint the retail investor; expectedly rates on small savings schemes were left unchanged.

As an added incentive the tax exemptions on these schemes were not watered down either. Effectively status quo was maintained.

The minister also announced the launch of a Senior Citizens Savings Scheme, which will offer a return of 9%; the proposed scheme will replace LIC's Varishtha Pension Bima Yojana. From the retail investor's perspective, the budget was nothing short of a windfall.

Having said that retail investors need to have a strategy in place while managing their investments in small savings schemes. Inflationary pressures, the perpetual nemesis of assured return schemes will test the attractiveness of these schemes going forward. Investors should take care of the following aspects for small savings schemes.

  1. Tenure:
    The possibility of an uptake in interest rates continues to be a distinct possibility. To counter such an event, investors should try to invest in schemes with a shorter tenure. Post Office Time Deposits offer the opportunity to invest at higher than market rates (e.g. 6.25% for a 1-Yr deposit) and yet retain the high safety levels. Similarly schemes like the Public Provident Fund (PPF) wherein the rates are adjusted in tune with changing market conditions would prove to be smart choices.

  2. Liquidity:
    Maintaining liquidity in your investments is always a smart strategy. Your investments in small savings schemes are no different. Schemes like the Kisan Vikas Patra, the Public Provident Fund and Time Deposits should be given preference over those like the National Savings Certificate which offer no exit clause.

  3. Regular returns:
    Investors who are seeking regular returns should consider the 8% GOI (Taxable) Bonds and Post Office Monthly Income Schemes (POMIS). The 8% GOI (Taxable) Bonds should find favour with investors, thanks to the Finance Minister's proposal that states that "no one with a taxable income of Rs 100,000 will be required to pay income tax."

  4. Investments for senior citizens:
    The Finance Minister didn't disappoint senior citizens and launched a scheme that will offer a return of 9% pa. Apart from the stated scheme, senior citizens should opt for the POMIS and the 8% GOI (Taxable) Bonds with the half yearly interest payment option to meet their needs for regular and assured income.

For the risk-averse investor whose investment domain is populated by small savings schemes and assured return instruments, this was nothing short of a dream budget.

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