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Getting the best of debt instruments -PPF NSC etc

For risk-averse investors, there is a choice of a wide range of debt products. Each of the products has its own utility, depending on your goal and investment horizon. Debt products may not be as aggressive as equity, when it comes to return on investment. For the risk-averse, though, these combine safety, returns and tax-efficiency.

Debt funds are more liquid and tax-efficient compared to bank deposits. They invest in easily saleable fixed-income securities such as banks' certificate of deposits and highly credit-rated companies' commercial papers maturing in 91 days. They offer investment flexibility, unlike fixed deposits. The interest earned on short-term funds is added to your income and taxed as per slab.

If you have slightly less than a year in hand, opt for the dividend option (where dividend distribution tax of 14.16 per cent is paid by the fund house). You can thus enjoy higher post-tax returns, especially if you fall in the higher tax bracket (30 per cent). Even for those in the 10 per cent bracket, FMPs can deliver because you need to stay invested for over a year or 13 months to get the indexation benefits.

Currently, FMPs are giving 10.5 per cent return, compared to the 9.25 per cent of bank deposits. If you are very sure of your time horizon and want tax efficiency with minimal fluctuations, then opt for FMPs, says Hemant Rustagi, chief executive officer of Wiseinvest Advisors.

"But, if you are not too sure of your horizon, opt for short-term debt funds," he adds. "If you are looking for assured returns and no interest rate risks, then consider one-year bank deposits."

Three years
If you are looking to buy a car in the next three years, certified financial planner Anil Rego suggests monthly income plans (MIPs). These can invest up to 75-80 per cent in debt, and the remaining in equity. This can provide safety, along with returns. The other option could be dynamic bond funds. MIPs and dynamic funds give around seven and nine per cent pre-tax returns, respectively, with indexation benefits.

Five years
If you are looking to save for long-term goals like buying a house or funding your child's education or marriage, put money in long-term avenues like five-year bank deposits. It is safe. Besides, it is currently giving lucrative returns, too.

Currently, 9.75 per cent is the highest interest you can earn on fixed deposits (City Union Bank). But, if you want to exit a deposit before maturity, you will have to pay a small penalty. The amount invested in bank deposits is exempt from tax for such tenures, though the interest income is added to your total income and taxed on the relevant slab.

Five years and above
For an even longer horizon, first exhaust the small savings schemes and then enter into other instruments. These products, such as the public provident fund (PPF) and national savings certificate (NSC), are good saving options for goals like retirement planning. NSC and post office recurring deposits give pre-tax returns of 8.6 and 8.4 per cent for five years. In the case of PPF, it is 8.8 per cent.

While PPF is completely tax-exempt (both investment and interest), the interest income on NSC is taxed according to the relevant slab.



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