The government has again slashed interest rates on small savings schemes like PPF, NSC and Senior Citizen Savings Scheme by 10 basis points, which is a double whammy for small investors along with escalation in GST on supply of services from the earlier rate of 15 per cent to 18 per cent. Although these incremental cuts in interest rates look small, but they have now become a regular affair and will be reset every quarter. This means that if this continues like this, then in the long run even government-backed schemes may not remain reliable, which doesn’t augur well for small investors, particularly those saving for retirement. So, what should they do now? Where should they invest? What are the options left for them?
Financial planners say that interest rates are currently moving southwards. Hence, it is important to plan one’s future finances, keeping this reality in mind.
In fact, “Indian investors have been spoilt by various governments in the past by having options backed by state guarantee at rates significantly higher than the inflation rates. So there was practically no effort or research required by common investors as there were RBI Bonds and various small saving schemes like PPF, NSIC, KVP etc. available at mouth-watering interest rates. This scenario, however, has been gradually shifting over the last decade or so as the government has been gradually lowering its liabilities on account of high interest on small saving instruments. Still, it is a great time to be an investor in India. Perhaps, even better than the earlier times of high return, government-backed bonds,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Experts says that for investors having an appetite for research and equity market investments, for instance, we are truly in a golden period now. Equity and mutual fund investing cult has finally arrived in India. Also, we are still in the early stages of what promises to be a great and long Bull Market, referred to as the ‘Mother of all Bull Markets’ by some leading investors. “This sort of a bull market usually comes in every country when they are transforming from an extremely low level of development indicators to a respectable level of living standards. This happened in Japan from the 1960’s to 1990’s and in the South East Asian Economies in 1980’s and 90’s. There are a number of indicators that suggest we are as a Nation entering the same level of transformational development. Therefore, for equity investors there cannot be a better time than this in India,” informs Kapur.
So far as investors not having the knowledge or time to track the stock markets are concerned, there is always the mutual fund route. Here again the mutual fund industry has evolved very well with more than 35 asset management companies, a plethora of schemes, a robust regulatory framework and growing participation from investors.
Moreover, for investors still looking for government-backed schemes, the scenario is certainly not gloomy. Government-backed schemes will always remain in some form or the other. Though the interest rates are likely to keep getting lower, the good news is that inflation is also contracting. In fact, interest rates will go lower only as long as inflation is easing. So, “effectively the net earning for any investor in these schemes does not radically change. This is because you really need to be earning more than inflation for improving your financial position. So as long as government-backed schemes do generate significantly higher return than inflation, investors have no reason to complain. Going by the recent moves on both inflation and interest rate adjustments, it is clear that the latter will follow the former at least in the near foreseeable future. So here too investors have nothing to worry,” says Kapur.
Jitendra P S Solanki, CFP & planner for special needs member families, agrees and says, “Reduction in small savings rate is a big blow to small investors as many of their planning aspects rely on it. In these situations, however, long-term products like PPF can still be a viable investment option since one can receive higher interest compared to that earned on many other options. However, investors should start taking a little bit of risk even in the debt portfolio and should consider debt mutual funds for long-term investing.”
There are, thus, plenty of lucrative options available for investors today. Depending upon their risk profile, they can chose the most suitable amongst them. According to experts, lowering of interest rates does not alter the scenario for investors in any negative way. It just calls for better understanding of one’s risk profile, return expectations and a judicious asset allocation amongst various options available.