The government has again slashed interest rates on small savings schemes such as PPF, NSC and Kisan Vikas Patra by 20 basis points. This has been done for the January to March 2018 quarter, which may again prompt banks to lower deposit rates, giving a further jolt to investors. For instance, interest on PPF has been lowered to 7.6 per cent from 7.8 per cent earlier, while KVP will yield 7.3 per cent now as against 7.5 per cent earlier. Thankfully, interest rates on savings deposits and 5-year Senior Citizen Savings Scheme have been left unchanged, but that is only a small relief for small investors as well as senior citizens.
It may be noted that the small saving schemes interest rates, which are linked to the benchmark 10-year government bond yields, are now reset every quarter, which is certainly not good for small savers and senior citizens. However, the question is: if these schemes are not good, then what are other options and where should such people park their money now?
|Rate cut on small savings schemes|
|Instrument||Rate of interest (old)||Rate of interest (new)||Compounding frequency|
|1 Year Time Deposit||6.8||6.6||Quarterly|
|2 Year Time Deposit||6.9||6.7||Quarterly|
|3 Year Time Deposit||7.1||6.9||Quarterly|
|5 Year Time Deposit||7.6||7.4||Quarterly|
|5 Year Recurring Deposit||7.1||6.9||Quarterly|
|5 Year Senior Citizen Savings Scheme||8.3||8.3*||Quarterly and paid|
|5 Year Monthly Income Account||7.5||7.3||Monthly and paid|
|5 Year National Savings Certificate||7.8||7.6||Annually|
|Public Provident Fund Scheme||7.8||7.6||Annually|
|Kisan Vikas Patra||7.5 (will mature in 115 months)||7.3 (will maturein 118 months)||Annually|
|Sukanya Samriddhi Account Scheme||8.3||8.1||Annually|
Financial experts are of the view that such falls in interest rates are surely a dampener for investors. However, this is our future as movements in small savings interest rates are a sure thing now. Investors, therefore, should take a note of this.
“In my view, long-term instruments like PPF remain a considerable option since they have a sufficient long horizon and provide tax-free compound interest. In such a long period, investors can aim for 8% returns from these avenues which is what we target from debt investments. But short-term investment avenues like term deposits and NSC are going to be hit hard. They are the first priority for Indian savers and with interest rates being quite low now, they have become unattractive,” says Jitendra P S Solanki, MCSI, CTEP, CFP and Financial Planner for Special Needs Dependent Families.
So, what options do investors, particularly small investors, have now? According to financial planners, options like debt mutual funds, liquid mutual funds, and ultra short-term funds are still ideal options for short-term investments. For medium-term investments, arbitrage funds and equity savings funds may be a good choice. “An ideal option for investors now will be to diversify and seek exposure in these avenues. One thing which all investors should keep in mind is that fixed returns are now passe and we will have to live with variable returns. Thus, whether you are investing for a short or long term, you will have to devote more time to money management now,” suggests Solanki.