Post office schemes best option for safe, guaranteed returns

Debt funds better route for those looking at longer investment tenures

As banks cut their deposit rates, post office savings schemes are the only option for investors seeking guaranteed returns on their investments. But if you are willing to take some risk, debt funds can be a better option.

For short-term investors, post office savings schemes (POSS) have the potential to offer returns on a par with or higher than fixed deposits (FDs), without any penalties on withdrawal. For long-term investors, these are a more tax efficient route.

Interest rate on State Bank of India’s (SBI’s) five-year fixed deposit is at an 11-yearlow and fetches 6.5 per cent. The one-year deposit has fallen to a seven-year-low at 6.9 per cent. The bank has also cut interest rate by 0.5 per cent for FD tenured between 180 days and 210 days, offering 6.5 per cent annualised returns. Those investing between 211 days and less than one year will now get 6.5 per cent returns, against seven per cent before March 1. There’s a further 10 basis points (bps) and 20 bps reduction on longer tenure deposits.

If an individual in the highest tax bracket puts money in fixed deposit, he will have no real returns, considering inflation at more than four per cent.

Opt for post office fixed deposits if you are an individual looking for maximum safety and guaranteed returns. POSS also makes sense if you don’t have taxable income or your tax slab is 10 per cent.

There’s not much difference between banks and post office as far as short-term deposits are concerned. But as the tenure gets longer, the difference becomes wider. While SBI gives 6.5 per cent on three-year deposits, post office rate is 7.3 per cent. For five-year FD, SBI offers 6.5 per cent and the post office rate is 7.8 per cent.

If you can take some risk for better post-tax returns, debt funds are better options. A few debt fund categories in increasing order of risk are: Liquid, ultra-short-term, short-term, income and dynamic bond funds. Investors need to choose a category based on their investment horizon. If you want to invest for a month, go for a liquid fund; for onethree months, opt for an ultra-short-term fund; for at least one year and up to three years, go for a short-term fund; if you have three years or more to spare, invest in an income fund. While the first three categories are relatively safe, income funds and other longer-duration schemes carry duration risk.

“An investor going from FD to debt funds and wishing to invest for two years or more should look at schemes that have an accrual strategy in the short-term fund category,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. “As income funds are actively managed, they are volatile and first-time investor may not have a stomach for it.”

In accrual-based strategy, the fund manager buys and hold papers until maturity and, therefore, these are not highly volatile.

Alternatively, long-term investors can also look at fixed maturity plans, which can give 50-100 basis points higher returns than bank FDs of a similar tenure. As an investor holds these funds till maturity, he can avoid interest-rate related volatility. In these long-tenure debt investments, one can use the cost inflation index while calculating tax to reduce total tax outgo. “At present, if an investor encashes his earlier investment, the total tax comes to around 3-5 per cent if indexation is used,” adds Sadagopan.