You can give Kisan Vikas Patra a miss

You can give Kisan Vikas Patra a miss

P Chidambaram recently hailed a brickbat at the relaunch of discontinued investment instrument by the NDA saying, “The government’s ostensible purpose in relaunching the Kisan Vikas Patra (KVP) is to promote savings. The argument seems suspect, as there are other fixed-income instruments that offer better returns.” Is it just a former finance minister trying to find faults with the new government? No, he seems to be correct. The KVP in its new version will double investors’ money in 100 days and offer 8.7% returns if the holder sticks out for eight years and four months. One has the option to withdraw after the initial lock-in of two years and six months. But the withdrawal window would open only at intervals of six months. The erstwhile denominations of Rs 100 have been done away with and now you can buy KVPs of Rs 1000, Rs 5,000, Rs 10,000 and Rs 50,000. Unlike the restriction of Rs 1.5 lakh applicable on PPF, there is no restriction on the upper limit of investment in KVP. What’s more you can transfer these umpteen times and can shift between post offices. Soon you wouldn’t even have to head to a post office as public sector banks would be permitted to issue KVPs. There is limited clarity on whether one would have to submit a PAN card. The bad news is there is no tax benefit at the time of investing and withdrawals are taxed too. Given this, the actual returns that one would get would be the only draw. Let’s weigh our options. The Public Provident Fund too offers 8.7% interest per annum, but the biggest difference here is that the returns are tax-free at the time of withdrawal, apart from offering tax benefit at the time of investment. If we were to take into account post-tax return of KVP at 10% tax bracket then the actual returns would be 7.8% and even lower at 6.01% for a person in the 30% tax bracket. The 10-year national savings certificate offers 8.8% over a period of 10 years, where the post-tax returns would be close to that offered under the new KVP. But another strong contender in the fixed-income options is the traditional bank fixed deposit. Bank FDs offer 9-9.25% for the five to eight-year FDs. Reduced for taxes, they would still garner 8.5-6.3% returns. Tax-free bonds too can be looked at by investors; these bonds issued last year by Hudco, REC, NHAI, etc have offered 24.5% over the issue price of Rs 5,000 even before completing a year. “Though one cannot purchase these bonds in the primary market, secondary market can be looked at, considering the yield to maturity of 7.3-7.7%,” says Vivek Damani, founder of financial advisory Jeevan Prabandhan. One cannot directly place debt mutual funds against KVP, which offers a fixed return. However, the current interest rate scenario places longer-tenure debt funds in a sweet spot. “Directionally, bond yields will come down so a long-term debt fund is a better option to look at as there would be a surge in returns. They should not get into a gilt funds, as they may not be habituated to the volatility,” Damani says.