What are principal financial instruments where I can park my money and save for a rainy day?
Answer
Answer
I suppose you are asking about just saving and not about growing your money. If you want to grow your money over time you need to look at taking the risk of equity or equity funds. However, if you only want to safely park your funds, there are various options in front of you. Here are a few of them.
Bank Fixed Deposits: Bank FDs, as they are popularly known, offer a higher rate of interest than your normal savings account. However, most bank FDs currently offer between 7-8% returns, which may not be too high if you consider inflation and the impact of taxes. Also, FD interest is taxed at your peak tax rate. While such bank FDs are almost free from default risk, they do have a risk of better opportunities foregone.
Corporate Fixed Deposits: Corporate FDs offer a slightly higher rate of return compared to bank FDs, but then they also entail a higher degree of risk. If the company that issues the FD defaults on its interest and principal commitments then the loss is yours. Normally, company deposits are unsecured so you will not have any means of recovering the amount deposited, except a very small portion of your investment. Also in terms of tax treatment, company FDs are inefficient since the interest on company FDs is taxed at your peak rate, just like bank FDs.
Post Office Time Deposits (POTD): POTDs can be opened at any departmental post office close to your house and that is what makes them so convenient. The minimum amount to be deposited in a POTD is Rs.200 and there is no upper limit. The rates of interest depend on the time to maturity. For example, a 1-year deposit attracts 7% interest while a 5-year deposit attracts 7.8% interest. These rates are subject to change from time to time and are notified by the Indian Postal Department. POTD accounts can be opened either in individual names or joint names and can also be opened in the name of a minor.
Post Office Monthly Income Scheme (POMIS): POMIS is also a post office deposit which attracts interest rate of 7.70%. There is a maximum investment limit of Rs.4.50 lakhs in an individual account and Rs.9.00 lakhs in a joint account. In case of multiple POMIS accounts, the collective ceiling for all the accounts put together will be Rs.4.50 lakhs. The interest is credited to your account each month. The POMIS can be cashed prematurely after 1 year by paying a charge of 2% and after 3 years by paying a charge of 1% of the withdrawn amount.
RBI Relief Bonds: The 8% RBI Relief Bonds used to be an attractive investment avenue as long as the tax benefits were available on the bond. Previously, the interest on the RBI Relief Bonds issued by the Reserve Bank of India was tax-free. However, subsequently, the interest on RBI bonds was not only made taxable, but there was also TDS deduction on this interest, making the instrument relatively unattractive in post-tax terms. The bonds have a maturity of 6 years and there is no upper limit on investments. Investors have a choice of opting for the non-cumulative (where interest is paid 6-monthly) or cumulative (where interest is accrued every 6 months and assumed to be re-invested). The removal of tax benefits has taken the sheen away from the RBI bonds.