Management of personal finance amid scams

IN THIS era of scams, financial management has become an important and difficult task. In the last decade we have seen considerable turmoil in the financial market.

Following the stock market collapse in the early Nineties caused by Mr. Harshad Mehta, we had the MS Shoes scandal, then the disappearance of a host of plantation companies that had collected over Rs. 25,000 crores from innocent, gullible investors, the CRB scam of 1997, yet another stock market turbulence following the presentation of the Union Budget, 2001, and, recently, the collapse of the Madhavpura Mercantile Co- operative Bank and a run on several other co-operative banks, courtesy Mr. Ketan Parekh. Besides the CRB, the other prominent NBFC failures have been Lloyds Finance, Prudential Capital Markets, Enarai Finance, Kirloskar Investments, Ceat Finance and Indian Seamless Financial Services.

Thousands of investors, mainly from the middle class, have been ruined in these financial failures. The bitter truth that has emerged is that investor protection continues to remain a pipe dream despite a plethora of laws, rules and regulations and an array of regulators in the form of the Reserve Bank of India, the Company Law Board (CLB) and the Securities and Exchange Board of India (SEBI).

The main problem is lack of co-ordination among these regulators. Each one passes the buck to the other. The net result, the harried investor has to run from pillar to post to recover his money. About legal remedies, the less said the better.

In this dismal scenario how does the common man protect his hard earned savings? How does he ensure that his investment is not only safe but is also liquid enough to give him a reasonable return to enable him to lead a decent life amidst rising prices and falling interest rates? These are the issues that the author proposes to deal with.

Keeping in view the yardsticks of safety, liquidity and returns, the order of investments, particularly for the retired or senior citizen, should be: (i) units of the Unit Trust of India (UTI), particularly the US-64 Scheme; (ii) post office investments, particularly the MIS; (iii) the PPF; (iv) the Government (RBI) Relief Bonds; (v) bank deposits; (vi) LIC's Bhima Nivesh policy; (vii) company deposits on a selective basis; and (viii) mutual funds, again, on a very selective basis.

Let us now examine the pros and cons of the above investment schemes.

(i) The UTI, the largest mutual fund in India, is fully backed by the Government and is hence a safe institution for investments. Moreover, income from all mutual funds is tax-free (as of now, till March 31, 2002). The dividend declared by the UTI under its flagship US-64 scheme was 13.5 per cent for 1998-99 and 13.75 per cent for 1999-2000. Clearly, therefore, this scheme offers the best returns, besides scoring in liquidity. (ii) The post office is another safe place for your money. It has a number of saving schemes for the common man, but the best among these is the Monthly Income Scheme. One can invest up to Rs. 6 lakhs in a joint account and earn a monthly interest of 9.5 per cent per annum which can be credited to a savings account in the same PO.

The lock in period is just one year and if the investment runs the full tenure of six years the investor gets a bonus, additionally, of 10 per cent. The biggest advantage in all PO investment schemes is that there is no tax deduction at source.

(iii) The Public Provident Fund gives you a tax-free income of 9.5 per cent annually besides qualifying for tax rebate at 20 per cent along with other eligible investments up to a total of Rs. 60,000. The common perception is that the PPF is not liquid enough. However, please note that though the fixed minimum tenure of the account is 15 years, withdrawals are permitted from the seventh year.

There is also a limited loan facility. What is not commonly known is that the account can be extended for five years at a time, indefinitely, after the first 15 years. Moreover, a withdrawal of up to 60 per cent of the balance standing to the credit of the account is permitted, in lump sum or annual instalments, at the end of the 15th year and at the end of each of the extended terms.

(iv) The five year relief bonds of the RBI also offer a tax-free income but at 8.5 per cent annually. The interest can be drawn every six months or at maturity.

(v) Bank deposits are, no doubt, safe as they are insured up to Rs. 1 lakh per account. They score high marks on liquidity. However, one has to reckon with TDS at the reduced limit of Rs. 2,500 per year per account according to the latest Union Budget, unless the Finance Minister sees reason in the innumerable representations made to him and restores TDS to the current limit of Rs. 10,000 per account.

(vi) The LIC's Bhima Nivesh is a single premium life policy for those between 35 and 70 years. The return, which is tax-free, ranges from 9.52 per cent to 9.72 per cent annually and comes with the maturity of the five or ten year policy. However, the minimum investment being Rs. 24,100, this investment scheme may not suit the small investor.

(vii) Company, including non-banking finance company (NBFC) deposits, are high risk investments and one has to be selective. There are, of course, some, but very few, established industrial houses that do safeguard the interests of the unsecured depositor.

(viii) Mutual funds, apart from the UTI and a few more, are risky ventures and one has to be careful about parking one's savings in these. The retired senior citizen (that is, any person aged 65 years or above), who is the most affected by rising prices and falling interest rates, should take note of the special tax relief extended to him under Sec. 88B of the Income-tax Act, 1961.

In terms of this section, he gets an additional tax rebate of 100 per cent, subject to a maximum of Rs. 15,000. This, in effect, means a tax-free income of much as Rs. 1.30 lakhs per annum.

A senior citizen getting a pension of Rs. 1 lakh per annum is entitled to a standard deduction of Rs. 25,000 while the permissible deduction from interest earnings from specified investments will be Rs. 9,000 per annum from June 2001 (as against Rs. 12,000 at present) if a provision in budget 2001 in this regard is passed without any amendment. Thus a senior citizen can hope to enjoy a tax-free income of up to Rs. 1.64 lakhs.

Finally, mention needs to be made about Sec. 88C of the Income- tax Act, 1961, introduced in the Finance Act, 2000. In terms of this new regulation, every woman assessee below the age of 65 years is entitled to claim an additional tax rebate, subject to a maximum of Rs. 5,000.

T. V. Ramachandran

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