Discontinuation of NSC cuts investor choices

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The government has decided to discontinue the national savings certificate (NSC) 10-year issue, thus reducing the investors’ options. New investments won’t be permitted in these securities, as they will no longer be issued by the post offices. As a result, investors looking at long-term investment options will have to take a relook at the choices present and start afresh. Let’s take a closer look into the matter and how the investors should deal with it.

Nature of investment

The 10-year NSC was an instrument, which allowed investors to accumulate the entire amount invested. This meant that the entire money, including the earnings, came to the investor only at the time of maturity of the instrument.

The interest earned on the investment kept getting reinvested and could be collected only at the time of maturity. This made it a good instrument for building capital over a long time period. One could ensure that the rate of return which prevailed at the time of making the investment was locked in for the entire duration of the investment. This made it a convenient route for those investors who wanted to stay away from the constant problem of monitoring and changing their investments in tune with the changing conditions.

Other options

There are a few other options that investors could consider if they are looking at long-term investment. One of these is tax-free bonds that are present in the market. There are two ways in which one can buy these bonds. First, purchasing when an issue comes up for subscription. Secondly, buying from the secondary market.

The duration of these bonds can be 10 years, 15 years and sometimes even 20 years, thus making them a good choice for long-term investors. The rate of return will be better for those in the highest tax bracket as compared to the NSC.

The tax-free nature of these bonds also makes them a good option because there won’t be any worry from the tax front. However, the one limitation that investors will face is that they won’t be able to accumulate the amount in these bonds, as many of them compulsorily pay out the amount of interest each year. Other choices like fixed deposits for a longer time period won’t match the NSC that has just been closed down, because the rate of return here has already dropped below what the NSC gave to the investors. An option like the PPF is also not comparable to the NSC.

Continuing choice

Those who want to invest only in NSC can still avail the five-year option. But they will notice a few differences. First, the lower time period for which investors can lock their money in will be different. Secondly, the current rate of return in the five-year issue will be slightly lower than that offered by the 10-year instrument.

(The writer is a chartered accountant and a financial planner)


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