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Financial Planning: Don’t Over - Invest in PPF, NSC

A professor of mechanical engineering has been a regular investor in traditional investment products for the last 30 years. His investment portfolio includes instruments like LIC, public provident fund (PPF), national savings certificates (NSC), fixed deposits (FDs) and infrastructure bonds.



For him, investment in equities was never a priority. He thought they were risky. More recently, he ran into a wealth m a n a g e r who told him that investments in traditional products are important but it shouldn’t occupy a major chunk of his portfolio. Now he is beginning to invest a little in mutual funds and equities.



Everyone hates losing money. But by playing too safe, you could also lose money by earning negative real returns (after taxes and inflation). Traditional investments were hugely popular 20 years ago. They were safe, gave decent returns and were easy to invest in. However, they have not borne the onslaught of private investment options very well.



Today, most of Sunder’s clients find that PPF and NSC are more about wealth preservation than wealth creation. When they wish to build a fortune, they’re better served by newer investment options like mutual funds.



In recent years we have witnessed a tremendous growth and strengthening of the capital market. With new techniques and more options of investment, traditional products are losing their place in today’s investment portfolios.



It’s imperative for rigid investors to bring in a change in their portfolios and strike a good balance between the traditional products and the new age investment avenues to get the best return on investments. The allocation in traditional tools has to be balanced according to the age, liquidity requirement and risk perception of the individual.



Wealth managers feel the primary attraction of traditional investments is the perception of safety. But today we have a range of options that offer similar safety, with better liquidity and higher post tax returns. The higher post tax returns arise out of the tax-free nature of dividends from liquid or other bond funds.

Pros and cons of traditional products


1) Returns:


Quite mediocre compared to equity investments such as stocks and mutual funds.


2) Risk:


Scores highly on this factor because government backs them. This is one reason why people are looking at them once again, given the current volatility in the markets.


3) Liquidity:


Is a definite disadvantage, as most popular traditional investments requires you to stay invested for many years in order to get the full return promised. Getting your money back in between can range from inconvenient to impossible. In case you want to exit, there’s a huge exit penalty.


4) Taxation:


At a time when the government wanted to encourage small savings, traditional investments were given tax advantage status. Now government has made some mutual funds and insurance investments equally tax efficient, so traditional products have lost their lustre.


5) Transparency:


Are quite transparent, with returns being determined by the government rather than by further investment in other instruments. But unit linked plans are also becoming more transparent with the regulator’s intervention.


6) Convenience:


It used to be convenient because of the excellent network of post offices and other authorized agents. While this is still the case, alternative investments are becoming easier with the advent of private financial institutions and widespread use of technology.



This is the e-investor era where everything happens at the click of a button, provide flexibility, liquidity, transparency and most importantly, attractive returns. However, excess of anything is bad and traditional investments should still form a part of one’s portfolio, but to a limited extent.

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