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Your investment starter pack

Five products that won’t ask for a churn or demand complicated procedures and yet would give you tax-friendly returns. Deepti Bhaskaran explains.

india Updated: May 12, 2012 01:17 IST
Deepti Bhaskaran
Deepti Bhaskaran
Hindustan Times

Just got into a new job and don’t know where to invest? While the market is full of investment options, it may not be easy to understand all of them. At this stage, you would want simple products that are easy to understand and yet are able to build a base for your portfolio.

Here are five products that won’t ask for a churn or demand complicated procedures and yet would give you tax-friendly returns.

Public Provident Fund

Public Provident Fund, or PPF, is a risk-free and tax-free investment product that is also capable of generating positive returns after accounting for inflation. PPF had been giving returns over the past several years, but last year its returns got linked to government securities’ rates. So now every year the return on your investment will vary. For the last financial year, the rate was 8.6% but for the current financial year, FY13, it is 8.8%.

PPF enjoys the exempt-exempt-exempt or EEE tax status, which means the contribution, accumulation and withdrawal are all exempt from tax.

Tip: You can maximise your returns by opening your account early in the financial year. “If you open your account in April, then you will earn interest for the entire 12 months,” said Veer Sardesai, Pune-based financial planner. “But if you open late, say, in December, then you will earn interest only on the remaining four months in the financial year.”

Employees’ Provident Fund

If you are a salaried individual, then this is probably the best investment product you have in your portfolio. Every month you park 12% of your basic plus dearness allowance in your account and your employer matches the investment.

From what your employer contributes, 8.3% goes into the Employees’ Pension Scheme or EPS, which offers you pension for life after the age of 58 years. The remaining corpus then earns a rate, which is declared by the Employees’ Provident Fund Organisation (EPFO) for each fiscal year. EPFO hasn’t declared the rate for the current fiscal, but for FY12, the rate is 8.25%. For about six years till FY10, EPF offered a rate of 8.5% and due to a windfall gain it offered 9.5% in FY11.

A dip of more than a percentage point means your money will be earning less but that is no reason to withdraw your money from the account. EPF still enjoys a favourable tax treatment. Like PPF, this product has an EEE status. But you need to maintain your account for at least five years to make the maturity proceeds tax-free. You needn’t be in the same organisation and under the same EPF account to clock up five years.

Tip: You can transfer your account as you change jobs by filling up form 13.

Fixed deposit

For investors having short-term goals and senior citizens looking for periodic income, FDs are useful investment products. These also work for investors who have just started working.

FDs offer no substantial tax relief, but five-year FDs qualify for section 80C deduction. Currently, these FD are offering 8.25% to 9.4% per annum. The interest that FD earns can be taken periodically or on maturity and is taxable.

“For conservative investors having short- term goals, FDs make sense,” said Pankaj Mathpal, Mumbai-based financial planner.

Tip: Since the interest is taxable, the effective yield on FDs will depend on your tax bracket. Returns will be highest for the lowest tax bracket.

Term insurance

We have said this plenty of times in the past but we would say it again: if you want a life insurance policy to protect your family in case of your death, pick up a plain vanilla term plan.

A term plan only includes the cost of insurance. If you die during the term, you get the sum assured or death benefit and if you survive the term, you get nothing back. Unfortunately, term plans are still not popular with insurance agents. Even now, what gets pushed as insurance policies are savings plans or market-linked investment plans. In these plans, your premium not only includes the cost of insurance, but a chunk also gets invested. But both the elements in one product comes at a huge cost.

Stick to a term plan that is the cheapest way to buy life insurance. The premium that you pay on term plans qualifies for a tax deduction under section 80C.

Tip: You can reduce the cost of term plans by buying it online. By selling term plans online, the insurer saves on distribution and administrative costs.

Health insurance

A basic health insurance policy is an indemnity policy that pays your hospital bills. It also reimburses expenses incurred before and after hospitalisation. Even the premiums on this policy qualify for tax deduction under section 80D up to R15,000 if you are not a senior citizen.

Begin with buying an individual policy. If you have a family you could top up your cover with a family floater. This policy considers the family as one unit and covers all the members of the family. If one member makes a claim, the sum insured is reduced on the entire family by that much in a year.

Tip: Look for policies that offer comprehensive cover. If your policy has a co-payment clause or sub-limits on expenses, you can port your policy from one insurer to another that offers comprehensive cover.

First Published: May 11, 2012 22:27 IST