Savings: Five options to choose from

These are managed funds that invest predominantly in debt and debt-oriented schemes.

As compared with direct deposit,these mutual funds offer a number of advantages. The most apparent is the fact that this is a managed fund and,therefore,returns can be better. A fund manager,being a professional and an expert,has access to more information and will leverage that compared with individual investors. There is no TDS tax deducted at source or tax on the interest. The returns will be processed as capital gains.

Returns from this fund are expected to be good. On an average,the top five mutual funds in this category in the last three years have given compounded returns ranging from 10.50 and 14.50 per cent. This is much better than the normal bank deposit or company deposit. While a normal bank deposit or a company deposit offer lower rate of return in a falling interest rate scenario,a debt mutual fund in a similar investment environment create capital gains.

Mutual fund mip 8211; growth

Monthly income plans MIP by mutual funds is yet another good option for investments. People who have a higher risk quotient during the short term can look at this option. Fund managers invest a small portion generally not more than 20 per cent in equity and the rest in debt. Since exposure to equities is a little higher in these instruments,returns expectation is also better than a normal debt mutual fund. During the last three years,top five schemes in this category offered returns ranging from 12 per cent to 14 per cent.

However,an investors needs to choose such funds with caution. There are funds that use principal amount to make the monthly payouts. This can drain the fund value,particularly when the markets are down. Therefore,study a fund carefully before you invest in one.

Being largely a debt-oriented mutual fund,tax treatment is the same as the debt mutual fund.

Company deposits

Companies that offer deposit schemes to consumers tend to offer rates that are in-between bank deposit rates and bank lending rates. This is a win-win situation for the company as well as the person investing.

The bank has to make profit when borrowing from the public and lending to companies. So they have an interest rate difference spread of about 4.5 per cent. In effect,the deposit holders are paid less and the borrowers are charged more. When a company has direct access to the depositor,both benefit. The depositor gets a better rate than what the bank can offer and the company is able to borrow at a lesser rate when compared to a bank interest rate.

However,it is in the best interest of the borrower to do his research thoroughly and double check how good the credit rating of the company is before investing. On an average,estimates show that one can easily get 11 per cent 8211; 12 per cent rate of return on reputed companies deposits for a 3 year term.

The returns will be taxed as interest and will have TDS.

Po recurring deposit

This is a five-year scheme where one invests on a monthly basis. However,one can close the fund after three years by paying a penalty amount of 1 per cent. The advantage with the postal recurring deposit over the bank recurring deposit is that the minimum monthly investment is only Rs 10 with no upper limit. In case the payment is made once is six months or annually,there are discounts for that too.

Nonetheless,one of the limitations of this scheme is the fixed rate of interest. By investing in this instrument you will earn only 7.5 per cent return during the year. Also,as of now post offices do not offer auto-debit facility.

There are no tax benefits from the scheme. However Post Offices have not been deducting TDS.

Post office mis

For the retired people,post office monthly income scheme is a good savings instrument. The interest is 8 per cent divided on a monthly payout basis. The payout,if not required,can be channeled to a recurring deposit. The effective return increases by almost 10 per cent by doing this.

The interest can be credited to a savings account of any bank too. The account can be closed after a year by paying a penalty pf 5 per cent or after 3 years without any penalty. The limitation,however,is that the maximum investment for any individual is only Rs 6 lakh.

The ranking of the above 5 savings schemes have been done based on their returns,convenience factor to close and change to another savings scheme important when the interest rate is rising and the safety for investments. Of all the options,debt mutual funds appear to score the highest due to their flexibility and returns. This is closely followed by the mutual fund MIPs. u

The writer is chief executive officer at the BankBazaar.com.