Why You Should Not Invest In Kisan Vikas Patra (KVP) Despite Amount Invested Doubles In 115 months?

Kisan Vikas Patra (KVP) is a small savings scheme backed by the government of India and is a popular fixed income scheme for conservative investors. VP account can be opened by depositing a minimum amount of Rs. 1000 and in multiple of Rs. 100 with no maximum limit. The government is providing 7.5% yearly compound interest under the KVP for Q1 FY24, however the most important aspect is that the money invested doubles in 115 months (9 years & 7 months). One of the finest returns on the market, much higher than those offered by bank fixed deposits from SBI, HDFC, ICICI, and Axis Bank, is promised by Kisan Vikas Patra (KVP). However, we consulted some financial advisors to invest in KVP, but they pointed out the reasons below which proves why you should not invest in Kisan Vikas Patra (KVP) despite the amount invested doubling in 115 months

Aashika Jain, Financial Expert and Editor, Forbes Advisor

Kisan Vikas Patra, now available for investment to all those who wish to opt for this savings scheme, is a risk-free investment which is backed by sovereign guarantee making it a solid bet. The annual compounding feature of the KVPs is a key driver that attracts investors but despite the invested amount doubling in 115 months, no tax rebates takes away this scheme's shine. The interest earned on KVPs is also taxable unlike other similar schemes such as the public provident fund and the national savings certificate, and is a dampener when it comes to selecting the most suitable saving scheme. KVPs' only saving grace is the lock-in period of 2.5 years, which is lower than other peer schemes.

Suman Bannerjee, CIO, Hedonova

While Kisan Vikas Patra (KVP) may seem appealing with its promise to double your investment in just 115 months (9 years and 7 months), there are several reasons why it may not be the best investment choice. Firstly, KVP returns are fixed and do not consider inflation, which means that over time, the value of your investment may diminish significantly. Additionally, KVP has a lock-in period of 2.5 years, limiting your access to funds when needed. Moreover, KVP returns are taxable, reducing the effective return on investment compared to other options that offer better tax efficiency. Lastly, investing solely in KVP lacks diversification, leaving your portfolio exposed to a single asset class. It is generally recommended to diversify investments across various asset classes like stocks, bonds, and real estate to manage risk and maximize returns.

Pamarty Venkataramana is an International Corporate Lawyer New Delhi India. Chief of PVR Global Laws

PVR :While the prospect of doubling your investment in 115 months (9 years and 7 months) may seem enticing, there are several reasons why you should exercise caution and consider alternative investment options instead of Kisan Vikas Patra (KVP): Inflation risk: KVP offers a fixed interest rate, which means it may not keep pace with inflation. Over the course of 9 years and 7 months, inflation can erode the purchasing power of your investment, potentially diminishing the real returns. Limited liquidity: KVP has a lock-in period, which means you cannot withdraw your investment before the maturity period. If you encounter any financial emergencies or require access to your funds, you will face restrictions and may incur penalties for premature withdrawal.

Opportunity cost: While KVP may offer a doubling of your investment, there might be other investment options available that provide higher returns over a similar timeframe. It's essential to consider other investment avenues, such as mutual funds, stocks, or bonds, which may offer better growth potential.

Lack of tax benefits: Unlike certain investment instruments like the Public Provident Fund (PPF) or tax-saving fixed deposits, KVP does not provide any tax benefits. The returns earned from KVP are taxable, and depending on your income tax bracket, this could significantly impact your overall returns.

Diversification and risk management: Investing solely in KVP exposes you to a single investment avenue, which can limit your ability to diversify your portfolio. Diversification helps spread risk and reduces the impact of a potential loss in any one investment. By exploring a mix of different asset classes, you can better manage risk and potentially achieve higher overall returns.

Evolving investment landscape: The investment landscape is continuously evolving, with new financial products and opportunities emerging regularly. It's crucial to stay informed about the latest investment options, consider your financial goals, risk tolerance, and consult with a financial advisor to make well-informed investment decisions.

Remember, no investment is entirely risk-free, and it's important to carefully evaluate your financial goals, risk tolerance, and the overall suitability of any investment option before making a decision.

Satyen Kothari, the founder and CEO of Cube Wealth

While Kisan Vikas Patra (KVP) may appear to offer a doubling of the invested amount in 115 months, there are several reasons why it may not be an ideal investment option, despite the attractive returns.

Firstly, one of the main drawbacks of investing in KVP is the absence of tax benefits. Unlike other investment instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC), KVP does not provide any tax deduction under Section 80C of the Income Tax Act. This means that the entire interest earned on KVP is subject to taxation, reducing the overall returns.

Additionally, a Tax Deducted at Source (TDS) of 10% is levied on the interest earned on KVP. This further reduces the effective returns, as a portion of the earnings is withheld as tax.

Another disadvantage of KVP is that it is not open to Non-Resident Indians (NRIs) or Hindu Undivided Families (HUFs). This limits the pool of potential investors and restricts the flexibility of the investment.

Furthermore, while the annual yield of 7.5% may seem attractive, it is important to consider that similar returns can be achieved through other investment options, such as fixed deposits (FDs) offered by banks. However, unlike FDs, KVP is relatively illiquid, meaning that funds are locked in for a fixed period. This lack of liquidity can be a significant drawback, especially in situations where funds may be required urgently.

Taking these factors into account, despite the promise of doubling the invested amount in a specific time frame, KVP may not be a favourable investment option for individuals seeking tax benefits, flexible liquidity, or a wider range of eligible investors. It is crucial to evaluate the overall financial goals and consider alternative investment avenues before making investment decisions.

Shavir Bansal, Financial Advisor

The Kisan Vikas Patra offers an interest rate of 7.5%, which is relatively lower than similar schemes such as the National Savings Certificate, Senior Citizens Savings Scheme (SCSS), and Sukanya Samridhi Yojana (SSY). Unlike these other schemes, the Kisan Vikas Patra does not provide any tax benefits under Section 80C of the Income Tax. For an individual in the 30% tax bracket, I doubt if the returns from KVP would be able to beat the Inflation. After tax deduction, you'll make a return of 5.25% from KVP and the Inflation rate for the 1st half of 2023 stood at 5%.

Udayan an IRDAI-registered insurance advisor, a Mutual Fund Distributor

Today, the KVP offers an annual interest of 7.5%. The good part is that the interest rate gets locked in for the duration of 115 months and it also has premature withdrawal options available after 2 years and 6 months. While the KVP scheme has no glaring disadvantages, if I was looking for safe fixed-income instruments, I would be more inclined to invest in good quality debt funds and the RBI Floating Rate Bond which currently gives 8.05% per annum (National Savings Certificate Interest Rate + 0.35%), albeit with a longer lock-in.

Himani Chaudhary, Financial Advisor

Kisan Vikas Patra provides a return of 7.5% as of now and it is a good investment for new investors because it provides inflation beating fixed returns with least risk.

However there is no tax benefit for the investors, which makes it less attractive. Although I believe tax alone should not be a factor to decide whether you should invest in that scheme or not.

But given other investments like FDs, PPF and NSC are providing similar returns with tax benefits under section 80C, it makes sense to go for these schemes instead.

Disclaimer

We do not recommend investment decisions and only provide information by consulting industry analysts. Neither the author, nor Greynium Information Technologies, nor the brokerage firm should be held responsible for losses based on the above article. Please consult a professional advisor before investing.