Keeping Up With The Inflation’s (An outlook on the reality of interest and investment)
When it comes to “risk-free high-return” investment plans, we are all essentially looking for the proverbial pot of gold at the end of the rainbow.
Spare yourself the trouble, because you won’t find it. An investment in a savings account won’t make you a billionaire. It can only happen with an augmentation of your appetite for risks. An enormous appetite for risk, however, requires the ultimate source of wealth — Capital. A limitless, bottomless source of capital that is available at all times. Sadly, most of us don’t have that privilege, the one of being born with a large silver spoon.
As it were, most of our lives were spent keeping up with the Joneses.
So what can we do to address our financial health needs during this time?
Whatever precious little we’ve squirreled away can be invested in an investment plan.
An ‘interest income’ is the most reliable source of income. And, the idea behind a monthly income scheme is that you invest an amount of money and earn interest each month. It is as simple as that. Yet, in analyzing and evaluating many schemes, the strategy you use is paramount. An effective plan includes: Knowing your investment objectives and choosing a suitable time-span.
High-Interest Savings Accounts or High-Yield Savings Accounts (HYSA):
HYSA is a savings account that offers a higher rate of interest than an ordinary savings account.
The online banks that offer HYSA typically offer the best interest rates available. HYSA rates worldwide are usually 15 to 20 times better than a regular savings account. In India, the highest rate of interest offered by any financial institution is not more than 9%. Such a rate of interest is meager if compared to any HYSA overseas. If an Indian citizen has an offshore bank account, he or she can reap the benefits of a HYSA. An offshore bank account is lawful if the intention is not tax evasion.
HYSAs don’t just help your money grow faster; they also help you to keep tabs on your free-spending habits.
These electronically connected banks offering HYSA forbids an individual from holding multiple accounts. So your checking accounts and savings account get a clear distinction. The digital nature of the banks makes money transfers between these accounts seamless. Optimal fund management thus gets much easier because of such convenient divergence.
However, there are also some limitations to investing in a HYSA. Most HYSAs have more regulations than a regular savings accounts.
All the patrons at the bank must have a considerable deposit to open an account. The minimum down payment for HYSAs varies by bank. These accounts also have much higher maintenance and ancillary charges. You can withdraw or transfer cash only up to six times per month without paying any fees from a HYSA. High-yield savings accounts aren’t the best option for a lifelong savings plan either. No doubt, high-yield savings accounts offer higher yields than traditional savings accounts. The best way to approach a HYSA is through short-term investment plans.
Fixed Deposits (FD):
Historically, fixed deposits have been the most secure way for an investment.
An individual can open a fixed deposit account for as low as 1,000 rupees and get a set interest rate. FD interest rates remain unchanged, despite market uncertainty, thus protecting investors. We can make deposits for a term ranging from at least seven days to ten years at the most. It is for this reason that FDs are also called as term deposits. A longer term with periodic liquidity means a higher interest rate. Further, the payoff depends on whether you receive the interest intermittently or invest back in a cumulative FD.
The investments are usually onetime unless you opt for a recurring FD.
Banks as well as non-banking financial companies (NBFCs) offer FDs in India. In April 1992, a single ceiling rate of 13% was imposed on all deposits over 46 days. After October 1997, the correlation between deposit rates and bank rates was removed. As a result of this deregulation, the Reserve Bank gave commercial banks the freedom to set their own interest rates. In general, nowadays, the interest rates on FDs range between 6%-8%, depending on the bank or NBFC. Investing in other risk-free, guaranteed returns schemes comes with a long lock-in period. Whereas, fixed deposits provide fluidity in fund management.
The tenure of an FD can vary from 1 week to 10 years, but it can also be dissolved in an emergency with a minor penalty.
We can reopen FDs with ease, and you might receive extra interest rates. Investing in a Fixed Deposit for a shorter term will help you stay on top of the ever-increasing inflation. A fixed deposit can also be used as collateral for securing loans up to a certain amount. On the whole, a fixed deposit is an excellent, low-risk investment option. As long as the rate of inflation does not rear its head ahead of fixed deposit interest rates.
Public Provident Funds (PPF):
Public Provident Funds are long-term holding options that provide attractive rates of return.
The key to achieving a risk-free retirement is making smart capital budgeting choices. An account with PPF is tax-exempt for interest and returns earned. It was created in 1968 as a means of organizing small savings into a form of investment with fair returns. The Indian government manages PPF investments. Compared to other options, such as savings accounts, FDs, and ELSS, they are more stable.
Government-sponsored PPFs currently have an annual interest rate of 7.1%. PPF investments are fixed for 15 years.
Even though PPFs are locked up for 15 years, they allow for partial withdrawals and loans. After completing 6 years, there is an option to withdraw money from the start of the 7th year. Once a year, one can withdraw the amount. We can extend the duration of PPF in perpetuity by increments of five years. Opening a PPF account is possible at any Post Office or in any nationalized bank. A few private banks also have the authority to open PPF accounts. We can open PPF accounts with a minimum investment of 500 rupees and a maximum of 1, 50,000 rupees. We can make investments as a lump sum or in installments up to 12 if desired.
Unlike FDs, which can have up to three holders, one individual can only open a PPF account.
The PPF account also must be funded at least once a year for 15 years. The optimal time to invest is on or before the 5th day of the month for best returns. A PPF account deposit is tax exempt according to Section 80C of the Income Tax Act. So, investors seeking tax benefits while avoiding market volatility should consider PPFs. Like Fixed Deposits, Public Provident Funds offer little inflation protection.
National Savings Certificate (NSC):
Another state-sponsored savings plan is the National Savings Certificate (NSC).
NSC, as we know it today, was founded after the National Savings Scheme Rules were amended in May 1989. The rules established were under the National Savings Scheme Rules of 1987 and the Government Savings Bank Act of 1873. Besides post offices and nationalized banks, the NSC scheme can be accessed at licensed independent banks as well. A National Savings Certificate can only be issued to an Indian citizen. You can invest as little as 100 rupees in this scheme. Also, there is no ceiling imposed on the amount of money one can invest in here.
There is a 5-year lock-in period after which the certificate cannot be renewed.
To extend the scheme beyond five years, you will have to buy a new certificate. And, the certificates issued at the end of the tenure include a current rate of interest. An account can be terminated without penalty after three years from the last deposit. In the event of death of an account holder, that account can be dissolved at any time. NSCs (VIII Issue) now have a maturity term of five years instead of six. As of today, 6.8% is the interest rate paid on NSC after a period of five years. Under this scheme, interest earned is consolidated every year.
The capital amount and interest accrued are not subject to tax under Section 80C of the Income Tax Act, 1961.
Patrons of NSC schemes can also take out loans against their NSCs. Loans from banks can be as much as 70% of NSC valuation. You can repay it with EMIs or you can get overdraft aid in exchange for capital protection. The only downside of NSC is that it is not yet available online. The three types of NSC accounts are — single holder, joint certificate A and joint certificate B.
Gold Exchange-Traded Fund (ETF):
“A true desire for gold is not for gold, but for the freedom and benefits it brings.”
As the 19th century transcendentalist philosopher R W Emerson aptly put. Nearly two centuries later, Emerson’s observation still rings true for most of us. And, the most efficient way today to buy gold is investing in a Gold Exchange-Traded Fund (ETF). Graham Tuckwell invented Exchange Traded Commodities. In 2003, he launched the first gold ETF in the world.
The Gold ETFs are printed or digital representations of gold ownership.
An ETF offers all the benefits of owning genuine gold without the hassle of storing it. The ability to protect against the lurking threat of inflation is one of the key benefits of ETFs. In general, gold is seen as the safeguard against inflation and currency depreciation. The basis for gold ETFs is 99.5% pure gold bullion, unlike the actual gold we buy, whose purity is often not guaranteed. Owning one Gold ETF unit is the same as owning one gram of gold. A gold ornament typically requires paying 20% — 30% of the gold’s value in manufacturing fees. While Gold ETFs have a management expense ratio of 1% and commissions as low as 0.5%. Gold ETFs also offer trouble-free liquidity.
The Securities and Exchange Board of India backed, Gold ETF rates are logged on the websites of BSE and NSE.
We can do investing in or divesting out of gold ETFs any time through brokerage and demat accounts. Furthermore, a gold standard ensures a constant exchange rate in the international market. With Gold ETFs, you can not only maximize your savings but also profit from inflation. There are perhaps only two assets that are inflation-proof: gold and real estate.
