Small savings schemes see big rate cuts; What should investors do now?

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Published: April 1, 2020 2:40:05 PM

The slashing of small savings rates by up to 140 bps has arrived as a double whammy for small investors and senior citizens already reeling under the impact of the COVID-19 crisis and economic downturn.

Small savings schemes, post office schemes, rate cut, Small savings schemes rate cut, PPF, NSC, Sukanya Samriddhi Yojana, Senior Citizens Savings Schemes, PO time depositsExperts say the lowering of interest rates should not deter risk-averse investors from continuing their investments in small savings schemes to achieve their long-term financial goals.

The slashing of small savings rates by up to 140 bps has arrived as a double whammy for small investors and senior citizens already reeling under the impact of the COVID-19 crisis and economic downturn. The rate cuts were widely expected, but nobody would have perhaps expected one of the steepest cuts in the rates of small savings schemes such as PPF, NSC and Sukanya Samriddhi Yojana at this time. Now the main worry of a majority of small investors is, what to do in such a scenario and how to keep their capital protected.

Financial experts say that the slashing of interest rates for small savings schemes for the April-June quarter was on expected lines due to the steep fall in interest rates brought about by the economic fallout of the ongoing coronavirus pandemic. However, the fact remains that small savings schemes like the Public Provident Fund, National Savings Certificate, Post Office Time Deposits, etc. offer assured returns and capital safety, which often build the foundation of our investment strategies. Moreover, social security schemes like the Sukanya Samriddhi Yojana, Senior Citizens Savings Schemes, etc. involve a targeted and disciplined investment approach to achieve specific financial goals of high importance such as retirement or children’s education.

“The Covid-19 crisis has already started adversely impacting the global economy, and the possibilities of a recession cannot be ruled out. So, considering all these factors, it would be safe to argue that the lowering of interest rates should not deter risk-averse investors from continuing their investments in small savings schemes to achieve their long-term financial goals. Moreover, even those investors with a higher risk appetite should consider investing in small savings schemes in proportion to the demands of their life goals for the safety of their capital against market-linked risks,” says Adhil Shetty, CEO, BankBazaar.com.

Strategy for Risk-Averse Investors

Keeping all these facts in view, risk-averse investors prioritizing capital protection over returns can stay invested in small savings schemes. However, those invested in PO Time Deposits and PO Monthly Income Scheme should compare the rates offered on fixed deposits by some private sector banks and small finance banks.

“These banks not only offer higher interest rates on their fixed deposits, they are also covered under the Deposit Insurance Program of DICGC, an RBI subsidiary. This program insures bank deposits, including fixed, recurring, current and savings accounts, of each depositor in each bank of up to Rs 5 lakh in case of a bank failure. So, those wishing to deposit over Rs 5 lakh can spread their deposits across multiple banks to reduce their capital risk to NIL,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

Strategy for Investors With Higher Risk Appetite

Investors with higher risk appetite can consider ultra-short debt funds for their short-term goals, i.e. those maturing within 3 years, and hybrid funds for those maturing within 3-5 years.

“For long-term goals, they can consider ELSS mutual funds if they wish to save income tax under the Section 80C of the Income Tax Act. Else, they should invest in diversified equity funds as equity indices have corrected by over 30% since their peaks in January with quality equities available at very attractive valuations,” adds Kukreja.

One should also remember that equity as an asset class has always beaten fixed income assets by a wide margin over the long term. In the current market scenario, investors should prefer multicap funds over other fund categories as these funds are free to invest across all market capitalisations and segments according to changing valuations and various fundamental and technical factors.

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