Fund Query: Where to invest for assured returns bettering those from FDs

Lipi Sahu

A combination of low risk, high return as well as high liquidity is the best one can get, especially senior citizens. However, it is difficult to pinpoint one instrument that offers all three aspects. Nevertheless, the ₹4 lakh savings can be distributed among a set of instruments in such a way that, overall, the risk is minimised, the return is optimised as well as a certain amount of liquidity is made available.

Since your mother is a senior citizen, prioritising safety over returns makes sense. Market-linked products such as mutual funds don’t provide assured returns and capital erosion cannot be ruled out. Fortunately, there are instruments such as Senior Citizen Savings Schemes (SCSS), NSC and post office time deposits (POTD), that are sovereign backed and provide complete safety. The good thing here is that these instruments also today provide returns better than FDs offered by most banks. Interest rate on five-year fixed deposits of leading public and private sector banks ranges from 5 to 5.75 per cent now. The SCSS and NSC, which has a similar tenure, offer a higher 7.4 per cent and 6.8 per cent returns respectively. The 6.7 per cent offered by 5-year POTD is also superior to bank deposits. Though some small finance bank (SFB) FDs offer returns similar to the NSC and 5-year POTD, the small saving schemes enjoy better safety. Deposits with SFBs are covered by deposit insurance of only up to ₹5 lakh, unlike small savings which enjoy full government backing. Recent experience of short-term curbs on withdrawals, be it in the case of YES Bank or LVB, shows that investing in small savings is more hassle-free.

As far as liquidity goes, the NSC is a bit unfriendly as premature closure is allowed only on death or when ordered by the court. In SCSS, though, account can be closed any time after the date of opening. POTD allows withdrawal any time after six months. However, in both cases, a penalty may be applicable in the form of reduced interest rate for early closure/withdrawal. Since you have stated that she would withdraw it only for emergencies, the penalty can be seen just as a small price to pay for the assured return, safety as well as the liquidity. POTD for tenures less than five years can also be considered as the 5.5 per cent returns provided by them is better than what some banks offer for the same tenure.

The PM Vaya Vandhana Yojana for seniors — offered by the LIC and backed by the government — gives returns in line with the SCSS (7.4 per cent now). The returns will be reset annually. You will, though, lock into the rate you are investing at, for 10 years.

Again, like the SCSS, there is no option to compound the returns but only monthly, quarterly, half-yearly or annual payouts. Premature exit with a 2 per cent penalty on principal is allowed in case of critical or terminal illness of self or spouse.

If she is looking for regular income, the PMVVY and SCSS are ideal. Only thing to note here is that since SCSS has a much lower tenure than the PMVVY, the rate reset will be quicker here. This matters when investing at the bottom of the rate cycle as is the case now, as you will end up locking into a lower rate for a longer tenure in the PMVVY. Unlike these two instruments, in POTD, the returns can be compounded. You can also choose the tenure based on the interest rate outlook as well as the premium offered over bank deposits.

You can divide the ₹4 lakh in such a way that a certain sum you think is needed for meeting emergencies is invested SCSS/POTD/PMVVY. The rest can be allocated to NSC.

For medical emergencies, apart from your mother setting aside her savings, you can consider taking a family floater health policy for your family and including your mother in the same. This could work out to be more cost effective than procuring a policy for her now, if she does not already have one yet.

Send your queries to mf@thehindu.co.in

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