Fixed income: Lock in higher rates in post office deposits this month

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Updated: September 18, 2019 1:50:08 AM

Given the falling interest rates in fixed deposits, risk-averse investor are facing reinvestment risks. Ideally, investors should look at some portfolio rebalancing to lock-in at higher rates for the long-run.

Fixed income, post office, deposit, income scheme, rbi, reserve bank of india, fixed deposit rates, fixed deposit, SBI, money news, Monthly Income scheme, Kisan Vikas PatraSmall savings schemes of India Post are still offering higher interest rates than bank deposits.

As Reserve Bank of India has reduced the repo rate by 110 basis points since February this year, banks are reducing their fixed deposits rates. This has affected risk-averse investors, especially those who are dependent on interest income as they will earn lower interest income on fixed deposits.

In fact, on September 10, the country’s largest lender, State Bank of India (SBI) had reduced interest rates on fixed deposits by 20-25 basis, its second revision in about 15 days. The interest rate environment in the economy will remain soft as banks have comfortable liquidity position and credit offtake still remains muted.
Given the falling interest rates in fixed deposits, risk-averse investor are facing reinvestment risks. Ideally, investors should look at some portfolio rebalancing to lock-in at higher rates for the long-run.

Higher rates in small savings
Small savings schemes of India Post are still offering higher interest rates than bank deposits. The government is likely to revise the rates, which will become applicable from October through December. Small savings rates are revised every quarter by the Centre depending on the bond yield.

For instance, while the one-year deposits rate for SBI is 6.5%, post office deposits rate for the same tenor is 6.9%. The difference in interest rates widens with increase n in tenor. A five-year SBI fixed deposits will give 6.25% interest rate. In contrast, an investor will get 7.7% interest rate in a five-year post office fixed deposits (See graphic).

Investors can also look at small savings schemes like 5-year National Savings Certificates which currently carries a 7.9% interest rate; post office 5-year Monthly Income scheme (7.6%); Kisan Vikas Patra (7.6%), where the money will double in nine years and five months.

Experts say that in the current interest rate scenario it is ideal to lock in money at 5-year small savings scheme. An individual will get income tax benefit under Section 80C of Rs 1.5 lakh for investing in 5-year post office deposits, just like any 5-year bank deposits. However, tax has to be paid at the marginal rate on the interest amount earned from deposits. There is no limit on investment amount in post office term deposits, unlike Public Provident Fund or Sukanya Samriddhi Account where the investment amount is capped at Rs 1.5 lakh in a financial year.

The term deposits can be opened by an individual and nomination facility is available at the time of opening and also after opening of the account. The account can be transferred from one post office to another and number of accounts can be opened in any post office. Also, in CBS Post offices when any term deposit account matures, the same account will be automatically renewed for the period for which the account was initially opened.

Consider debt mutual funds
Individuals can consider debt mutual funds as an alternative investment option in this interest rate scenario, which have the potential to generate superior tax adjusted returns. However, there is credit risk associated with debt mutual funds. Investors must invest in those funds where the investment is done in AAA-rated paper.

Investors must look at those funds where the fund manager is not just chasing returns by taking higher credit risk. An investor must consider his risk appetite and time horizon before investing. As all debt funds have credit risks, interest rate risks and liquidity risks, investors must analyse them carefully before investing
Analysts say debt mutual fund scores over fixed deposits in terms of tax. While the the interest earned from fixed deposits is added to an individual’s income and tax accordingly to one’s slabs, tax in debt mutual funds is calculated on the basis of short-term and long-term capital gains. For short-term up to three years, the tax treatment in debt mutual fund is same as in fixed deposits and is taxed at the individual’s slab. For investments over three years, or long-term, the tax rate is 20% with indexation benefits, which makes final tax obligation much lesser. Dividends from debt mutual funds are tax free in the hands of investors.

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