Post Office MIS – alternative to FD

One of the things that never ceases to surprise me is the number of people who invest in Fixed Deposits with Banks and other financial institutions. Given that the interest from FD is fully taxable and that the rates are always revised downwards at the slightest opportunity, they definitely are not financial instruments that are investor friendly. However, people continue to invest in these and the banks mint money out of such investors.

Look at the present situation on interest rates. The banks have been rather quick to reduce the interest rates and for most part you would be lucky to get 7.5% to 7.75% for an FD you are opening today. Yes, they do have better liquidity, compared to many other products, but with the current low rates plus tax-ability of interest it really makes little sense to open new FD now. I have written in other posts on why you should consider tax free bonds if FD is a chosen investment platform for you.

Interest rates on the Small savings schemes such as PPF and Post office schemes will also undergo a reduction but that has not happened yet. I was surprised to learn yesterday that you will still get 8.4% interest on a Post Office MIS deposit if you get it done this month. The rates will be revised to 8% from the next month. I think for all readers who are looking at regular income, this is a good window of opportunity that you can use.

I will not get into describing POMIS as it has been done several times in many websites. The current term is 5 years and I believe you can get the interest credited monthly to your bank account. Liquidity is an issue but as the maximum investment is 9 lacs for a joint account, you will really not be impacted too badly on this score. For people who are not looking to use the interest, you can reinvest this in a Recurring deposit of the post office. The returns will not be great but you will get a decent sum after 5 years.

You need to be clear on your objectives before you do this. Obviously this is not a substitute for equity investments and should not be compared to such. This is purely a debt product and ideally a replacement for FD. I would also think that with the LTCG indexation becoming less potent with reduced inflation trends, this may even become comparable to debt fund instruments. PPF of course remains the chosen instrument due to the tax benefits that it offers but the term and liquidity will be a deterrent for many investors who are in their Forties and looking for a debt product to generate regular income.

So, if you are looking at such a product POMIS may well fit your bill. Remember, interest rates will go down and in another year you may be feeling good about the 8.4% interest when banks will barely offer 7%.

However, hurry on if you are interested – the rates will reduce from January.

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3 thoughts on “Post Office MIS – alternative to FD

  1. Equities are unlikely to give fair returns in the next one year with the next budget likely to push for social objectives and likely Chinese Yuan moves away from dollar peg. As oil prices keep sliding, middle eastern sovereign funds keep withdrawing from equity markets keeping the frontline, FII-heavy stocks under check.

    Bank or decent company FDs would be the best bet during 2016. Long term investors would have opportunities to build their portfolio.

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  2. Dear Sir,

    If PPF is only Debt part in ones(mine) portfolio do you think I should reduce the contribution if the interest goes down? Do you think PPF interest rate will change in the near future?

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