Govt lowers rates on small saving schemes: Time to review debt portfolio, say experts

By: | Updated: March 31, 2017 5:49 PM

The government has lowered interest rates on small saving schemes like PPF and Kisan Vikas Patra by 0.1 per cent for the April-June quarter and has also linked the rates of small saving schemes to government bond yields, which may prompt banks to lower deposit rates in line with small savings rates as offered by it.

Despite this small savings remain an attractive investment option for investors looking for safe options.

The government has lowered interest rates on small saving schemes like PPF and Kisan Vikas Patra by 0.1 per cent for the April-June quarter and has also linked the rates of small saving schemes to government bond yields, which may prompt banks to lower deposit rates in line with small savings rates as offered by it.

With this, while investments in the Public Provident Fund (PPF) scheme will fetch lower returns of 7.9 per cent as against 8 per cent earlier, Kisan Vikas Patra (KVP) investments will yield 7.6 per cent and the Sukanya Samriddhi Account Scheme will offer 8.4 per cent annually as against 8.5 per cent at present. Also, term deposits of 1-5 years will fetch a lower 6.9-7.7 per cent return that will be paid quarterly, while the 5-year recurring deposit has been pegged lower at 7.2 per cent, said a PTI report today.

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While small investors will fret over this rate cut by the government, experts say that the above move is both politically bold as well as economically correct. “Business and industry should get the benefits of lower interest rates. The only way of ensuring that would be that small saving rates also fall in line with the overall trajectory of softening interest rates,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

Ajit Narasimhan, Category Head for Investments, BankBazaar.com, is of similar opinion. “The reduction in the interest rates of small savings schemes comes as no surprise. The macroeconomic situation is such that we’ve seen a gradual reduction in all interest rates, including schemes such as PPF, which were earning in the region of 8.6% till about a year ago. The current rate cut is in line with the overall decline in interest rates in the Indian economy and is now calibrated on a quarterly basis in line with government bond yields,” he says.

This may be great for investors if the interest rates go up. But it’s also good for the government. Previously, if the 10-year bond yield was at 7% and if the PPF was paying 8.5%, the government had to pay 1.5% out of its own pocket. Now, the rates are linked to the markets.

“Even with the reduced rates, they are far more attractive than fixed deposits. PPF is also a very safe investment option with higher rate of interest than other options. but with a longer lock-in period,” says Kapur.

However, in the current scenario, should investors continue investing in schemes like PPF? “It’s important for them to focus on asset allocation while making investment decisions. Retirement schemes and long-term savings products must have an equity allocation for it to offer a meaningful return to investors. Mutual funds should be the best product for small investors keeping inflation in mind,” says Narasimhan.

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Experts say that for investors this is a time to review their debt portfolios, especially if the portfolios are inclined more towards small saving schemes. “What this scenario reveals is that interest rates may go down further if rates on govt bonds go down. More hurt will be investors of NSC or other avenues where interest is taxable. Although the PPF rate will now go down to below 8%, but this is a long-term investment avenue and 7.9% interest earned will be tax exempt. In my view, investors need to bring debt investment in their portfolio which can generate better returns in different scenarios. Ideally investors should start looking at debt mutual funds, if they have stayed away from it,” advises Jitendra PS Solanki, CFP & Founder of JS Financial Advisors.

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