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Three Popular Government-Led Schemes - Simplified

We simplify three popular government-led savings schemes, and ask three SBI-Registered Investment Advisers (RIA's) for their views on them too

Photo Credit : Shutterstock,

Sukanya Samriddhi Yojana
Launched by the Ministry of Finance under the umbrella of the "Beti Bachao, Beti Padhao" campaign in 2015, The Sukanya Samriddhi Yojana (SSY) has become quite popular thus far. The scheme itself is fairly easy to understand. You can open an account in your daughter's name, provided she's less than 10 years of age, by visiting the post office or a bank that offers the scheme (SBI, Allahabad Bank, ICICI Bank and HDFC Bank, to name a few). You can invest between Rs. 1,000 and Rs. 150,000 per year in the SSY account, and this amount is tax deductible under Section 80C. An online investment process has been provided recently. The SSY account will attract interest on the 10th of every month, and the moneys will be compounded on an annual basis. You'll need to continue making the deposits for a period of 15 years, and the balance will continue to attract interest until the 21st year of your starting the account; at which point it will mature, tax-free.

Alternatively, you may withdraw the entire balance, if you so desire, for her education purposes when your daughter turns 18, or when she gets married. The returns from this scheme are generally higher that the yield on government bonds. Presently, it stands at 8.3%.

Pros 
"    Sovereign guarantee ensures safety of principal
"    Better returns than traditional life insurance and government bonds
Cons
"    Returns are now revised every quarter - in a falling interest rate scenario, this can hurt
"    You'll be earning fixed-income returns in a very long duration (21 year) investment

Expert Speak

“Being a debt product, SSY will struggle to counter inflation in education & marriage expenses. For long-term goals, relying more on equity always helps. Assuming time is at hand, don’t depend entirely on SSY for your girl child’s future. Instead, allocate a major portion (~60%) to equity mutual funds. The smaller debt portion can be invested in SSY and PPF equally; as even though SSY gives higher returns, PPF eventually offers better flexibility and can also be used for your child’s own investment planning later”


Dev Ashish, Founder – StableInvestor.com, SEBI Registered Investment Adviser


Sovereign Gold Bonds
Launched by the Government of India in 2015 with the intent of controlling the detrimental impact of physical gold imports on the economy, Sovereign Gold Bonds (SGB's) have attracted significant interest. The third issue of the current fiscal concluded recently, with the price set at Rs. 2,934 per gram. SGB's are easy to understand. Launched by the Reserve Bank of India from time to time, they are priced in sync with the rate of 999 purity gold prevailing at the time of their issue. SGB's are sold through banks, post offices, and stock exchanges. A few days after the issue closes, they get listed on stock exchanges. SGB's have an 8-year maturity period, and the current tranche will provide investors with a half yearly interest of 2.5% (annualised) on the initial investment amount - not the current value, mind you. A premature exit option after 5 years has been provided, although the fact that they are exchange tradable makes them liquid. Individuals can buy up to the equivalent of 4 Kg of Gold in these bonds each year (approximately Rs. 1.15 Crores worth, per the last issue price). Interest from SGB's is added to an individual's income for the fiscal, whereas capital gains arising at maturity have been exempted from taxes. The maturity value of the bond will depend upon the price of 999 purity gold prevailing at that time.

Pros
"    Interest component guarantees returns higher than gold returns
"    Low transaction costs, tax efficiency, and liquidity due to exchange tradability

Cons
"    Poor performance of gold as an asset class in recent times
"    Interest is paid out on principal invested and not current value

Expert Speak
“SGB’s make a lot of sense given their long-term tax benefit, digital option, interest component & lower transaction costs. They are a step in the right direction to help the Government better manage the negative implications of physical gold import. However, it’s not a good idea to consider SGB’s just because of their features or benefits. Only investors having the due ­need to increase their portfolio exposure to gold as an asset class should consider these bonds.”


Rohit Shah, Founder & CEO at Getting You Rich, SEBI Registered Investment Adviser 



Pradhan Mantri Vaya Vandana Yojana (PMVVY)
The PMVVY (Pradhan Mantri Vaya Vandana Yojana) was launched recently, in an effort to address the burgeoning problem of post retirement income for India's senior citizens. The plan, open for subscription until May 2018, is a fairly straightforward 10-year annuity plan with a guaranteed rate of return. In a financial world replete with fine prints and disclaimers, PMVVY surely scores in terms of simplicity: the retired (60-plus) annuitant commits a lump sum ranging from 1.5 Lakhs to 7.5 Lakhs at the beginning of the plan, and starts receiving an "end of period" annual, bi-annual, quarterly or monthly income for the next 10 years, and the full money back at maturity. The rate of return ranges from 8% to 8.3% per annum, and carries a sovereign guarantee. Those opting for the monthly income receive the lowest rate of return whereas those opting for the annual income receive the highest rate of return. With the PMVVY, a retiree can generate between 12,000 and 60,000 of guaranteed income per annum for a period of ten years. Use this simple table to arrive at the income quantum generated for a deployment of Rs. X into this plan - for the monthly income mode, the minimum allowed amount is Rs. 1.5 lakhs, and the maximum amount is Rs. 7.5 lakhs. Discounts to this amount for the annual, half-yearly and quarterly modes serve to increase the effective yield of the plan. Notably, the scheme is exempt from GST.

Mode
Pension/ Rs. 1,000 committed
Annual
 Rs 83
Half-Yearly
 Rs 81.3
Quarterly
 Rs 80.5
Monthly
 Rs 80



Pros
"    FD beating returns ranging from 8% to 8.3% per annum, with a sovereign guarantee
"    Access to capital - premature exit option available for treatment of critical illness

Cons
"    Limited tenure of just 10 years - what then?
"    Maximum annual cash flow capped at an inconsequential amount of Rs. 60,000 per annum

Expert Speak
“Thumbs up. It could be looked at in addition to SCSS (Senior Citizens Savings Scheme). PMVVY could be a good idea for those senior citizen investors who are looking for a simple product, for regular cash flows.  the rate of return will remain 8% - 8.3% for the next 10 years, which is definitely good for senior citizens. It will ensure a smooth and consistent cash flow for them. Given the inflation rate of 4-5% p.a., the guaranteed pension at 8% - 8.3% p.a. is definitely good for retired investors”
Jignesh Shah, Founder, Capital Advisors and SEBI Registered Investment Adviser 





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