Personal finance mis-selling: Insiders story

Mis-selling of financial products is rampant in India. Basic financial literacy among common people is highly inadequate irrespective of educational background, profession, age.  This is exploited to the hilt by agents, bank relationship managers, personal bankers and others in mis-selling financial products to gullible people to meet their own target or earn hefty commission.

Public Provident Fund (PPF): Long term wealth creator

Public Provident Fund (PPF), a Government of India scheme is a long term safe wealth creator.

Features:

• Current interest rate is 8% compounded yearly.
• Maximum and minimum investment possible per year is Rs. 70000 and Rs. 500 respectively.
• Maturity date is based on financial year and not date of opening the account. For example an account opened on 2nd Nov 2009 will mature on 1st April 2025 and not on 2nd Nov 2024.
• Interest is calculated on the lowest account balance between close of 5th calendar day and end of month. So deposit the money before 5th of the month!
• After initial 15 years the account can be extended in a block of 5 years for as many times required.
• One PPF account allowed per person, cannot be opened in joint names.

Pros:

• Virtually risk free; backed by Government of India.
• Interest earned is tax free
• Tax Saving instrument - investment made falls under Section 80C.
• Since return is tax free, interest rate is very attractive for an debt instrument. To put this in perspective, for people who are in highest tax bracket of 30%, this is equivalent to FD with 11.43% return. [ (100/70)*8 = 11.43 ]  
• Low minimum investment, even people from lower income group can invest.
• Helps inculcate habit of regular and disciplined investment

Cons:

• Limited liquidity; partial withdrawal is allowed from 7th year onwards. On positive side this forces you to stay invested for long period and enjoy the magic of compound interest.
• Return is guaranteed but not fixed. Interest rate can change during the period of 15 years. But given huge number of investor, government does not reduce the interest rate that often because of political compulsion.

Who/When to invest:

• Risk free long term wealth creation.
• Long term goals like retirement planning.
• An ideal vehicle for non-salaried people to build retirement corpus. Unlike salaried people they don't have Provident Fund (PF)

National Savings Certificate (NSC): Assured return investment

National Savings Certificate (NSC) is a fixed interest long term instrument for investment. NSCs are issued by Department of Post, Government of India.

Features:

• Rate of interest: 8% per annum, compounded half yearly. Thus effective annual interest rate is 8.16%.
• Maturity: 6 years
• Minimum investment: Rs.100
• Maximum investment: No limit.
• Can be pledged as a security for availing a loan
• Denominations - Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000
• Available at all post offices

Pros:

• Return is guaranteed and virtually risk free; backed by Government of India
• Return is fixed, interest rate gets locked once investment is made. Hence investments are insulated from any subsequent change in rates. For example, on March 2003 interest rate was reduced to 8% from 9.0%. But any investment made till Feb 2003 continued getting 9.0% return.
• Tax Saving instrument - investment made falls under Section 80C.

Cons:

• Interest income is taxable as per the tax slab of the individual
• Limited liquidity; premature withdrawals are permitted only under specific circumstances like death of holder(s), forfeiture by the pledgee or under court's order.
• Capital appreciation after adjusting tax on interest and inflation is minimal or negative.

When to invest:

• One time surplus money
• For needs arising at corresponding timeframe.