Nscs A Way To Achieve Multiple Investment Objectives

An investment is made in a financial instrument keeping a particular objective in mind. And if the investment is done in a proper and systematic manner, it can single-handedly take care of multiple objectives. However, multiple objectives are achieved through several specific steps that might lead to different consequences for the investor.

Prateek is a 29-year-old professional managing his own business. He wants to make some tax-saving investments for the present financial year such that maximum tax is saved under Sec 80C. Every option considered by him has a specific lock-in period, and this will impact his overall investment. Prateek also doesn't want to invest a large amount each year on a recurring basis for the tax-saving purpose and is looking to optimise on the kind of commitment that this will require from his side.

Analysis

Prateek's prime objective is to save maximum tax. When building up of capital is not the main objective, then there is a manner in which a limited amount of money can be rerouted in the same investment over and over again.

This manner of usage of funds will require regular investments for the first few years from Prateek but after that the pressure of making new investment each year will go down. Again this is based upon the condition that the tax laws and other factors remain the same throughout the investment period.

How to go about it?

Prateek needs to choose a debt instrument that will mature in a period of time, and the investment will continue till the maturity starts wherein the maturity amounts are used for further investments.

Let us consider one such instrument here, the National Savings Certificate (NSC).

The investment done in the NSC in the first year will mature after completion of six years or at the start of the seventh year.

Similarly, an investment made in the second year will mature in the beginning of the eighth year and so on.

In this case, Prateek will have to make investment only for the first six years. From the seventh year onwards, he will be saved from making any fresh investments as he can use maturity amount for the same.

What are the objectives achieved?

NSC investments help Prateek achieve two objectives at one go. First, he will no longer have to invest additional sums for the purpose of completing his investment requirements and hence there would not be a pressure in the form of additional cash requirements. Second, he will receive a tax benefit on the entire investment. Interest on NSC investments is taxed but since this is also considered as an amount reinvested, it will also get the deduction.

Is there any other benefit?

NSC provides Prateek an extra benefit in the form of capital appreciation by means of the rise in the value of his investments. In NSC, there is a compounding of the interest and this is paid out only at the time of maturity of the instrument. (A sum of Rs. 1,000 invested in the NSC becomes Rs. 1,601 at the end of 6 years.) In this way, the investor can ensure that there is some build up of the capital also because if there is an aim to build a large amount then some additional investments at various stages will be required.

This benefit is absent in case of a normal fixed deposit or some other debt investment that has a regular payout. Here, the amount that is invested in the area remains the same because the basic investment figure is rotated while the investment earnings are taken away.

What should Prateek do?

When multiple objectives are involved, the investor has to ensure that his/her main objective is achieved. If Prateek just wants to take the benefit of the investment without continuously investing large sums then the NSCs would be useful. But the NSCs might not turn out to be high on the returns front, so if this is not an important area then it can be given a lower priority.