Retail investors are often confused between various names and various financial products. NSC, PF, PPF, FD etc all seem similar. Here we explain basic features of four financial products. Names may be familiar, the basic features may not be.
National Savings Certificates(NSC) is a Govt. of India Bond, it is basically used for small saving and income tax saving investments in India. NSC is a part of the postal savings system of Indian Posts. This can be purchased from any Post office in India. These are issued for five and ten year maturity and can be pledged to banks as collateral for availing loans. The holder gets the tax benefit under Section 80C of Income Tax Act, 1961. Current rate of return is 8.5%. Trusts and HUF cannot invest in NSC. There is no upper limit for investments. Returns of NSC are taxable. However, no Tax is deducted at source.
Systematic Investment Plan (SIP) is process of investing a fixed sum, regularly, in a mutual fund scheme. It allows you to buy units each month on a particular date, so you can implement a savings plan. The main advantage of SIP is rupee cost averaging. Unlike PF and NSC, SIP is not a product. SIP is just a mode of investment in a mutual fund. Essentially regular investment in a mutual fund is a SIP. An investor can invest in open ended Equity Fund or an ELSS (Equity Linked Saving Scheme or Tax Saving) fund. SIP has a history of mitigating risk and offering high double digit returns. An investor can start a SIP in an ELSS fund to save tax and earn higher returns. Anymore information on this can be sought from the mutual fund advisor and distributor, Mutualfundwala.
Provident Fund (PF). All of us have heard of PPF (Public Provident Fund) and EPF (Employee Provident Fund). There is essentially no difference between the two. Both are part of retirement planning. EPF is When an employee gets a part of his salary deducted with an equal contribution from his employer. Normally 12% of basic salary automatically goes into PF account. And employer has to contribute 12% too. However, an employee can contribute higher than 12% but the employer contributing over 12% is his choice. Maturity amount of EPF is paid either at retirement or resignation. Current rate of interest in EPF is 8.5%.
PPF is a voluntary provident fund scheme started by Govt of india. Any individual can open a PPF account and start investing. Anyone (including HUF) can open a PPF account (normally in nationalized banks or certain branches of Post offices). Maturity of PPF can be redeemed after 15 years from the date of opening of the account. Minimum contribution is Rs.500 every year. Current rate of interest in PPF is 8%. Returns are tax free
Fixed deposit (FD) is essentially and Bank Deposit which offers higher rate of interest than regular savings account. If the suplus money in bank savings account has no utility for a certain minimum period of time then it can be invested in a fixed deposit. It enables the depositor to earn higher interest on their surplus fund. There are certain disadvantages of FD. Firstly, the real returns (post tax) are lower than the inflation. Tax is deducted at source. Secondly, FD rate differs from bank to bank and is also different for different time periods. Higher the period, higher the FD rate. Lastly, an early redemption (then the period initially decided) in penalised and depositor gets a lower rate.
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