Just two years into his job, Raghavan doesn't take home a fat paycheck. After paying his rent, sister's college tuition and taking care of household expenses , he is left with a paltry Rs 2,000 every month. And this, he diligently puts in a piggy-bank at home.

Raghavan's is not an unusual story, for there are many like him who keep cash at home. What's wrong with that? Well, when money sits idle its value erodes, thanks to the killer inflation. This week we discuss some investing options that help you to start small.

Bank savings products

Banks offer two savings products - one is the recurring deposit (RD) account and the other the fixed deposit (FD) account. A savings account just facilitates money transactions and is not a long-term savings instrument.

All deposits in a bank are entitled to interest. The rate of interest however differs in each case, depending on the deposit's nature and tenure. Bank deposits carry a fixed interest rate, although banks occasionally give floating rate options.

Savings bank accounts enjoy the least interest rate of 4 per cent per annum currently. Interest on RDs and FDs are however at much higher slabs and therefore better manage the inflation effect. ICICI Bank's two-year RD as well as its two-year FD comes for an interest of 8.5 per cent a year. So now, how does a RD differ from a FD?

A recurring deposit account lets you make a fixed amount of deposit (some banks such as Andhra Bank offer options to step-up the contribution amount) regularly over a term and earn interest on it. The account can be opened with a minimum deposit of Rs 500 with most banks and for a minimum tenure of six months. Pre-mature withdrawal of deposit is allowed but then some banks pay lower of the original rate or the base rate applicable for the tenure for which the deposit has been in force while some banks put a penal charge of 1-2 per cent. However, do note while FDs across banks enjoy overdraft (o/d) facility, there are some banks that do not entertain o/d on RD accounts. Banks offer up to 90 per cent of the FD amount as a loan.

A fixed deposit account is one where you make a one-time lump-sum deposit and earn interest on it for the term it is locked with the bank. On breaking a FD before the expiry of its term, the deposit-holder will be given interest only for the term the deposit was in force. If you withdraw the amount partially, for the remainder of the amount interest will be reset according to then prevailing interest rate.

Post office savings

Your next-door post office also has some good savings options that include recurring deposits, term deposits, Public Provident Fund (PPF- maturity period 15 years) and National Savings Certificates (NSC- maturity period 6 years). Minimum deposit requirements with a post-office account are very low compared to a bank. A recurring deposit account for instance can be started with a minimum deposit of Rs 10 a month. In public provident fund, the minimum deposit is Rs 500 and with NSC it is Rs 100. However do go through policy wordings before you invest. Some of these schemes have a mandatory lock-in period and limit on maximum investment limit.

The interest rate on a 5-year RD is 7.5 per cent per annum; a 5-year term deposit also qualifies for the same rate of interest. PPF and NSC qualify for a little higher rate of 8 per cent per annum. The good news however is that a government panel has proposed to link the interest rate on post-office small savings schemes to the yields of government securities. If this proposal is accepted, based on the current rates, a 5-year term deposit with a post-office will fetch 8 per cent return against 7.5 per cent currently.

PF contribution

All establishments that employ 20 or more persons have to, as a mandate, offer provident benefits to employees. It is a retirement benefit scheme managed by the central government. The funds in this account earn interest and go to the employee at the time of his retirement. Recently, interest on provident fund has been increased to 9.5 per cent per annum (to be applied from 2010-11) from 8.5 per cent earlier. It is mandatory that an employee contributes 12 per cent of his pay (basic plus DA) towards his PF. However, if the employee so desires, he can make a request to the employer to increase his PF deduction. Early withdrawal is allowed for buying property, educational expense, medical and other admissible purposes. And even if you switch jobs you can have your PF account active and give the same account number to your new employer.

Game for gold?

If you are an investor thrilled by the safe-haven properties of gold, then you may buy demat form of the metal. Yes, like equities, gold is also listed in the market. You have the option of buying gold as ETF (exchange traded fund) in the stock exchange or in the electronic form (e-gold) in the National Spot Exchange. You can buy units of both through designated stock/commodity brokers. So, currently, if you have Rs 2,200 you can buy one unit of gold and store it in demat form. However, do remember that this may involve some additional charges like fund management charge in case of an ETF and brokerage in both the cases.

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