Kisan Vikas Patra is back in a new avatar for the aam junta with more investment options. The new scheme will look to bolster the savings rate in the country. However, if one goes by the financial experts, they say that the Kisan Vikas Patra as the name suggests would be more suited to people who are not interested in the regular financial products or do not fall under the tax bracket. However, the KVP is still good for the entry level investors who have access to the bank fixed deposits and mutual funds.
Suresh Sadagopan, the founder of financial planning firm Ladder7 Financial Advisories further justifies on the claim by saying that the Kisan Vikas Patra is a boon for the people who want to invest but do not know where. In such cases the KVP, is a boon for the lower economic people who do not have access to run of the mill financial products and whose income is well below the tax bracket. On the other hand, he further added that the scheme will not be useful for people who pay their taxes or have access to other investment options.
So what is the new KVP scheme all about? In short, the money you put into the KVP will double in 100 months, which is eight years and four months. On further speculation, the KVP generates a decent 8.67 per cent returns. To start off, all you need is amounts of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000.
Mr Sadagopan says that when comparing the KVP to the returns generated by bank fixed deposits, one can see that the fixed deposits generate up to around 9 per cent on more than 1-year fixed tenure. In the long run, if you make a fixed deposit, an investor can get more as well.
This has been the main issue against the attractiveness of KVP as an investment option. Speaking on the same displeasure, former Finance Minister P Chidambaram too voiced his opinion and said that there are other investment schemes which offer better returns.
Mr Chidambaram further added that this defeats the very purpose of the KPV, which is to promote savings in the country. The argument does have its weightage considering that there many options in the fixed income returns investments which offer better returns than KVP.
On further speculation, apart from lower interest rates, the KVP does not give any income tax benefits as well. In spite of earning less than bank fixed deposits, the interest earned from KVPs is taxable as well. So in short, if you fall under the 10 per cent income tax bracket, the final rate of interest will come down to just 7.8 per cent when you invest in the KVP. Even the 20 per cent tax bracket investor will get around just 6.9 per cent and the 30 per cent slab will just get 6 per cent returns.
Mr Sadagopan of Ladder7 Financial Advisories says that investors on the high end of the tax bracket can opt for fixed maturity plans (FMP) offered by mutual funds. The debt mutual funds offer indexation benefits and after a time horizon of three years this will surely help the investor save a huge amount going in to the taxman’s pockets. FMPs are nothing but close-ended mutual funds that have a lock in period of three years and predominantly invest in debt markets.
This means that after three years and with no income tax, investors can expect around 8.5 per cent. Currently, fixed maturity plans are available in duration of up to five years.