I put Rs 5 lakh in Kisan Vikas Patra (KVP) five years back. Should I break this and invest in bank fixed deposit (FD) of 8-10 years offering 9.5% and take compounding option for higher yield? I may lose short-term value (by end 2014 when KVP would mature), but will this create more wealth by 2020?
KVP doubles your money after eight years and seven months. It offers premature encashment after two years and six months. Since you have already completed five years, you can make premature withdrawal.
Your rationale of investment in long-term FD holds true if compared with KVP. KVP gives a return of 8.3% and if you reinvest in an FD at 9.5% (assuming higher lock-in is not an issue), it gives a 1% increment. The compounding benefit is available in both KVP and FD.
But there are two factors which you need to consider. First, there is a premature withdrawal penalty on KVP of around 1%. Second, whether you want a long lock-in for your FD. The current scenario defies that and it appears that the interest rate may not have peaked out. In this investment environment, there is an interest rate risk.
My daughter earn Rs 35,000 per month. Apart from Employees’ Provident Fund (EPF) contribution, she pays an annual premium of Rs 9,700 for a traditional plan, Rs 6,900 for a hospital care plan, Rs 20,000 for a pension plan and has Rs 20,000 in National Savings Certificate (NSC). She is left with Rs 15,000 per month in her savings account. What other investment options can she look at? Her immediate goals are her marriage and buying a house.
It appears that she has already exhausted her tax-saving limit under section 80C, including her EPF contribution. You need to evaluate the pension plan. Just because you have purchased it does not mean you keep it for a long duration. While it is difficult to surrender a product such as a pension plan, it is better to check the possibilities in case of nonperformance. Public Provident Fund can be a good alternative.
Instead of saving through NSC, she can switch to equity-linked savings schemes (ELSS). NSC has a long maturity period and if the risk appetite is there, ELSS may give better yield.
Further, hospital care plan is a product to have along with a health policy. It can’t be a substitute to health insurance. Ensure she has a comprehensive policy.
She should invest the surplus of Rs 15,000. A part of it needs to be invested in liquid assets as there is no liquidity in the portfolio, which she will need at the time of her marriage. You can consider bank recurring deposit and short-term mutual funds. For longer duration, she needs to start monthly investment in equity funds. HDFC Equity, DSP BlackRock Equity and Birla Sun Life Frontline Equity are good options.
Surya Bhatia, certified financial planner and principal consultant, Asset Managers
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