Postal savings products are gaining popularity among investors

Until about a year ago, Saroj Bhatia, a Mumbai-based postal savings agent in Andheri, rarely received calls from young professionals. But these days, half of her working hours are spent extolling the virtues of India Post schemes to yuppies wary of market-linked options.

Investment advisors like Bhatia stand testimony to the ambiguous concept of ‘flight to safety.’ Investors are returning to tried-and-tested investment products and showing more tolerance towards the slow but steady returns that saving instruments like bank fixed deposits, postal savings schemes and held-to-maturity bonds give. “Investors today are a scared lot because of the high volatility in equity markets, bond yields, gold and rupee. With macro indicators still looking weak, there is a need for investors to consider some low-risk investments,” says Raghvendra Nath, managing director, Ladderup Wealth Management.

According to wealth managers, stockmarket volatility triggered the first round of flight to safety. The sudden surge in bond yields during the July-August period this year, and the resultant decline in bond portfolio returns, further alienated investors from market-linked investments. Weak rupee and worsening economic conditions hastened the scramble for safe, fixed return investment products.

Low-risk products protect principal investments, but fail to beat inflation. Yet there has been traction in the number of people opting for such products.

Good Ol’ Post

Postal savings products are gaining popularity among investors in Tier 2 and 3 locations and in villages. Senior Citizens’ Savings Schemes (SCSS), Post Office Monthly Income Scheme (POMIS), Recurring Deposit Accounts (RD Accounts), Public Provident Fund (PPF) and even postal savings accounts that yield just about 4 per cent per annum, are in demand.

“People have become quite risk-averse after the financial crisis in 2008. Investors in smaller cities and villages are not even comfortable investing in bank FDs. This, perhaps, explains the significant increase in postal savings account. The thrust is mainly coming from rural folk,” said Gali Sarish, an investment analyst with Nagpur-based Moneybee Institute.

The PPF is a hot pick among salaried investors.  India Post manages PPF money worth Rs 35,992 crore across 2.3 million accounts. Investments in PPF yield an annual interest rate of 8.7 per cent for 15 years. Participants have to deposit a minimum of Rs 500 (maximum can be Rs 1 lakh) every year. Interest earned is tax-free. Investors can also avail loan facility from the third year up to the fifth financial year. “PPF is a good investment product as it allows the flexibility to invest in lumpsums. I invest in one shot at the end of the year,” says K.K. Pradeepkumar, who works for a tyre manufacturing unit at Kochi, Kerala.

Risk-averse retirees and senior citizens can park their money in SCSS, which offers 9.2 per cent interest, paid out quarterly. Minimum deposit is Rs 1,000 and the maximum can be as high as Rs 15 lakh. The scheme is open for savers aged above 60 (years) and investment maturity period is 5 years. Investments in SCSS attract tax deducted at source (TDS) if the interest payout is more than a specific sum of money (changed periodically).

“SCSS is a good instrument for senior citizens as it provides returns comparable with bank FDs,” says Bhatia. India Post has over 1.2 million SCSS accounts with an outstanding balance of Rs 26,763 crore.

For steady monthly income, there is POMIS, which offers 8.4 per cent interest per annum but which is paid every month. Investments can go up to five years. Maximum investment in a single account can be Rs 4.5 lakh and Rs 9.5 lakh in joint accounts. Interest earned is taxable in the hands of the investor — it is added to your taxable income and taxed at the marginal rate. Premature withdrawals come with an exit load.

India Post manages over Rs 2.05 lakh crore across 24 million POMIS accounts.

Another popular investment product is postal recurring deposits, which yield over 8.3 per cent per annum. The number of such accounts has grown from 67 million in 2007 to almost 86 million in 2012. As on March 2012, India Post managed investments worth Rs 6.26 lakh crore in RD accounts.

An RD account is a simple deposit account. The amount of deposit made at the time of opening the account cannot be changed; that is, the investor has keep investing the same amount of money every month till maturity. You are allowed four defaults (in monthly payment) during the entire tenure of the fund. The account can be closed prematurely after 3 years. RD accounts allow (part and) premature withdrawals but there could be deep cuts in interest pay-out. These are generally opened for five years. Interest earned is exempt from tax.

“People are shying away from investing in long-term plans; this is true even for postal savings schemes. This is why schemes such as time deposits, cumulative term deposits and fixed deposits are not popular among investors. We are advising investors to invest in PPF and SCSS. PPF allows tax benefits and interest-free income at maturity while SCSS seems much better than several bank deposit schemes,” says Sarish of Moneybee Institute.

source-www.businessworld.in