The woes of small investors seem unlikely to end, at least in the near term. For, soon after the reduction in interest rates on small savings schemes like PPF, NSC and Senior Citizen Savings Scheme by 10 basis points — which came a double whammy for small investors along with escalation of GST on supply of services from the earlier rate of 15 per cent to 18 per cent – the State Bank of India has now reduced its savings deposit rate by 50 bps to 3.5% for deposits with ticket size of Rs 1 crore or below. And with the RBI expected to cut rates in its policy meet on Wednesday, more banks are likely to follow suit with a reduction in their savings deposit rates. So, what should small investors do now? What are the options available for them?
Financial experts say that we are living in a world of reducing interest rates. Whether it is fixed deposits or PPF or savings accounts, the trend is clear – interest rates will continue to fall in view of very low inflation rates. Therefore, while it may pinch small investors and big investors alike, it is always wise to formulate one’s investment / saving strategy based on the time available.
“Currently there are a plethora of choices for investors. In order to beat the lower and taxable interest that savings accounts or fixed deposits provide, the wiser choice is the Liquid category of mutual funds or the Liquid Plus category or the Ultra Short Term Category of mutual funds. Most of the mutual funds provide instant redemptions of the liquid schemes using a mobile app and the amount gets credited to your saving account within less than 30 minutes. Some mutual funds provide you with a debit card to access the funds using ATMs,” says Atul Surana, Certified Financial Planner, Catalyst Financial Planning.
While savings accounts provide 3.5% taxable returns, these liquid schemes can deliver after tax return of 5 – 5.5% on the investments made. These funds do not invest in risky assets and hence safety of the capital is as good as in the savings accounts. Investing in Liquid schemes is better than keeping your money idle in savings accounts as they provide better returns, similar liquidity and safety of capital.
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Moreover, “the RBI is expected to cut interest rates in its meeting scheduled tomorrow and if that happens, the fixed deposit interest rates will be cut further. The best thing to do, therefore, is to divide the amount available in your bank accounts into small parts based on the time available for investing. This will ensure that the total return on investment of such portfolio is better than that of fixed deposits at all the time. You can also consult a professional Financial Advisor and get yourself prepared for the short term as well as long-term goals and needs,” says Surana.
Some financial experts say that with bank deposit rates headed downwards and rates already below 7%, investing money in bank deposits is unattractive now. So, what to do?
“There is no doubt that investors will have to look at alternatives. For the long term, say beyond 5 years, investors should consider hybrid funds if they have been relying on FD for long-term investments also. Equity exposure is desired now to beat inflation. Therefore, investors who invest in equity and debt and FD is part of their debt portfolio should move to debt mutual funds to earn better returns. The cause of more concern are short-term investments, say for 1-2 years, since you can choose only debt. Here debt mutual funds such as liquid, ultra short term funds or short term funds are an ideal option for short-term investments,” says Jitendra P S Solanki, CFP & Planner for Special Needs Member Families.
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Another option is payment banks which are currently giving higher interest rates with Paytm at 4% and Airtel Payment Bank going up to 7.25%. These are said to be a good option to park one’s short-term surplus for better returns.
“Payment banks are the latest entrants in the NBFC space in India. As of today, there are 4 operational payments in India. They all allow depositors to deposit up to Rs 1 lakh. The interest rate they offer ranges from 4% to 7.5%. Like banks, they too charge for value added services. For instance, one of them charges 0.65% cash withdrawal fees and 0.5% for transferring funds to another bank. Payment banks can issue cheque books and debit cards to the depositors. Eventually, they can extend their scope of services to MFs, insurance, etc. though they do not provide them as yet. However, unlike full-fledged banks, they cannot deal in any credit product including credit cards loans,” says Ajit Narasimhan, Head–Investments, BankBazaar.com.
An SB account with a traditional bank serves two purposes. In the first place, it is a place where you can park any excess fund that you may have. There is no limit to the funds you can keep in an SB account, so long as you furnish details of how you acquired those funds. It is also your primary relationship with the formal banking system, and forms the basis of your financial history. This is essential if you need to access credit products such as credit cards or loans.
“From this perspective, payment banks cannot be a complete substitute for traditional banks. That said, savings accounts are not the primary savings option. They are merely a place to park your funds until you invest them. From an investment perspective, at the very least, you should consider an FD. In terms of liquidity and returns, liquid funds and short-term debt funds offer very good liquidity, security, as well as significantly higher returns,” informs Narasimhan.