Systematic investment in bank deposits
Union Monthly Plus.
Pay without pocket pinch: A deposit that allows customers flexibility in
monthly investment.
Vidya Bala
Union Bank of India has recently launched a recurring deposit that allows
investors to enjoy the returns of a term deposit while allowing flexibility to
invest varying sums into the account every month.
Union Monthly Plus is a recurring deposit scheme offered for individuals,
institutions, corporates, partnership, trusts and HUFs. Investors can put in an
initial amount and add to it by way of instalments made every month. Investors
can vary the term of the investment for any period between 6 and 60 months (in
multiples of one month).
Instalments
This deposit scheme requires investors to choose a minimum core amount (initial
investment) that can vary from Rs 100 to Rs 1,00,000 and deposit it initially.
Investors may have to choose the core amount conservatively, as the subsequent
instalments cannot fall short of this amount. Future instalments can, however,
be hiked up to 10 times the core amount.
For example, if an investor deposits Rs 1,000 initially, the subsequent monthly
instalments cannot be less than Rs 1,000 a month. The maximum can go up to Rs
10,000 a month (10 times the initial deposit).
The positive feature of the instalment facility is that the investor need not
make the monthly contribution in one shot. The contribution can be made once or
over the course of a month. In other words, investors can just add to their
deposit savings kitty as and when they manage to build some surplus.
Depending on one's monthly expenditure, the contribution can also be stepped up
or lowered, as long as it is above the initial deposit amount.
There would be no penalty for delayed payment of instalment or failure to pay
instalment in a given month.
Interest
The recurring deposit would enjoy returns similar to the prevailing term
deposit interest rates offered by Union Bank. The interest rate for a five-year
term deposit is 9.5 per cent. Hence, a recurring deposit opened now for 60
months would earn 9.5 per cent.
Interest rates are credited on a quarterly basis and would be compounded and
received at the end of the deposit term.
However, for the purpose of calculation of interest, the bank would consider
only the minimum balance between the 10th and last day of a given month.
Thus, any instalment for a given month would earn interest only if it is
deposited before the 10th of the month.
For instance, if you invest Rs 1,000 on January 2 but make the next instalment
of say Rs 2,000 on February 11, the interest for the month of February would be
calculated only on Rs 1,000 and not Rs 3,000.
Other features
The scheme does not impose any penalty for premature closure of the deposit. In
other words, if an investor who had chosen a five-year scheme opts to withdraw
his deposit there will be no charges. Interest would be calculated up to such
period of withdrawal. The bank has also stated that being a cumulative deposit,
there will be no deduction of income-tax at source irrespective of the amount
of interest earned. Investors should, however, note that the interest would
attract income-tax at the investors' slab rate at the time of filing the
return.
Investors can also avail a loan against the deposit for up to 25 per cent of
the deposit amount at 2 per cent over the deposit rate.
Review
For the five-year Union Monthly Plus Scheme, the post-tax return will depend on
the tax slab of the individual. An investor ploughing Rs 1,000 a month over 60
months would receive close to Rs 77,000 at the end of the term. Note that the
interest earned (of close to Rs 17,000) would suffer income-tax. The product
may be attractive for those in the lower income slabs.
The scheme is suitable for those without sufficient surplus to invest a lump
sum in a term deposit.
It also provides an opportunity to invest systematically in a safe debt option.
But those who have large surplus might find a regular term deposit providing
three-year returns of 10.5-11.5 per cent better.
The product may also not fit the bill of retired and senior citizens looking at
a monthly source of income.
http://www.thehindubusinessline.com/iw/2008/12/14/stories/2008121450641300.htm
Government cannot make man richer, but it can make him poorer
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