Small options for small savers

Experts say post-Budget, small savers should settle for low interest but safe instruments like RBI infrastructure bonds, Public Provident Fund and even bank fixed deposits. The returns on these instruments range from 6 per cent to 8.5 per cent and you’ll get tax rebates too on these instruments.

Mutual funds are a good bet too as dividend tax has been scrapped. Despite war fears taking a toll on the domestic bourses, open-ended equity schemes of mutual funds (MFs) have posted a 8.11 per cent return for one year period up to February 2003, says a Crisil’s monthly risk return rankings for MFs.

Equities moved in a narrow range but debt market witnessed some spectacular rises, the differentiating factor being Budget day. The debt MF schemes posted a 13.6 per cent return for one year up to February ’03. So, take your pick.

Says Nikhil Johri, CEO of Alliance Capital Mutual Fund: “Debt funds not only stand to benefit from the 100 basis points rate cut in the small savings rate but will also give huge tax benefits to the investors who’ve invested in debt-oriented schemes. That the Reserve Bank of India (RBI) has cut the savings bank rate to a mere three and a half per cent proves that the mutual funds are a superior vehicle of investments.”

For risk-taking investors, stock markets—especially technology stocks—could be a route to increase short-term returns. But it’s also the most risky investment options as the falling stock markets since the Budget must have shown.

It will be a good idea for senior citizens to invest in Life Insurance Corporation’s new pension plan under which the government is guaranteeing a return of 9 per cent. The loss on the part of LIC will be compensated by the government as a subsidy and senior citizens must the best use of this instrument as soon as it’s launched.

For all those who are looking at saving taxes for the current financial year, March is the last month to save and claim tax rebates from your work-place. Insurance schemes offering life cover and good returns is a good option. You can get tax rebate up to 20 per cent if your salary is below Rs 1.5 lakh per month and 15 per cent for salary above Rs 1.5 lakh to 5 lakh. Proceeds of these schemes are generally tax free.

A silver lining for small savers—especially for parents of school and college going children—in the Budget was the announcement that children education up to Rs 12,000 will get tax exemption by the government. It is a decision which came 50 years late. Nonetheless, the government has finally realised the importance of education and rising costs. A tax payer can expect 20 per cent tax rebate under Section 88. Again, 20 per cent tax rebate for Rs 12,000 means you will get a tax rebate of up to Rs 2,400 and an investor needs just show proof of tuition fees to the tax authorities to claim the rebate. This is a very good step which will go a long way in making India literate. Though the finance minister has increased the standard deduction to Rs 30,000, it will not make you richer. You should be happy if you get exemption of even Rs 125.

With falling interest rates and stock markets, Indian small savers do not have much choice. The Budget 2003 will help small savers to turn into super consumers as cost of many consumer durables including cars have come down. According to experts, the middle class will benefit if—taking a cue from the small saving rate cuts—banks and FIs cut their lending rates. It will make all loans—including tax-saving home loans —and other consumer durable loans cheaper.