The investment strategy for many savers, especially senior citizens, would have to be tweaked owing to the 70-140 bps (100 bps make 1 per cent) reduction in interest rates on small-saving schemes. The NSC, PPF and SCSS, among other schemes, would earn a lot less.
The reduction in interest rates mean that these investments would deliver the lowest returns ever.
What you would earn now
Even though the post-office savings account rate has been untouched at 4 per cent, the interest rate applicable on the Senior Citizen Savings Scheme (SCSS) has been reduced to 7.4 per cent, while Post-office Time Deposits would earn 5.5-6.7 per cent – down 120-140 basis points. The Public Provident Fund has seen a rate cut for the first time since July 2019, and will now earn 7.1 per cent now.
The interest rate on the Kisan Vikas Patra, which doubles the amount invested at maturity, fell by 70 bps to 6.9 per cent to force an increase in the maturity of the instrument by 11 months to 124 months. The Sukanya Samriddhi scheme ranks highest in the pack, with an interest rate of 7.6 per cent.
Vivek Rege, Founder & CEO V R Wealth Advisors, “The crucial bucket of savings that cater to senior citizens, girl child and provident fund continue to earn more than 7 per cent.”
Why were the rates reduced?
The reduction is a part of the quarterly interest rate review exercise that government has been following since 2012. The alterations are based on the changes in yields on government securities to which these small-saving instruments are benchmarked.
The rate cut was long overdue, but the Government kept them untouched in the January-March quarter despite several changes in yields. But the Reserve Bank of India’s (RBI) 75 bps cut in repo rate – the rate at which RBI lends to banks – acted as the trigger.
Banks were the first to cut interest rates on deposits and loans. While small-savings appeared attractive in comparison to bank deposits earlier, the difference is significant now.
Bank FDs are more attractive than small savings scheme if we consider the difference in rates. State Bank of India’s term deposits for tenures of one to five years offer 5.7-6.2 per cent, while Post-Office Time deposits (POTS) for the similar time horizons would now earn 5.5 per cent. The five-year tax-saving post office time deposit offers 6.7 per cent interest, which is still attractive and earns more than what leading banks offer.
Investments already made in NSC, SCSS, Kisan Vikas Patra and other small savings schemes prior to the announcement would be shielded from the interest rate cut. Only fresh investments made, starting April 1, 2020, in these avenues, would face the rate axe.
Should you continue with post office savings?
While the rate cut is steep, it had been long-pending. You can continue to invest in these instruments for various goals based on your asset allocation.
As Rege suggests, “One should first aim to exhaust the SCSS, PPF and Sukanya Samriddhi limits, wherever applicable, and later move to the other bucket. Stay invested in these scheme as much as possible and don’t be yield greedy. Despite the rate cuts, senior citizens should avoid opting for credit-instruments offering market-linked returns.”
But all small-saving schemes come with the highest safety – higher than even commercial and co-operatives bank deposits. Don’t consider risky corporate deposits that promise very high returns.
“Risk may enter your portfolio if you invest money in private enterprises as, during such testing times, good businesses too tend to go belly up,” Rege warns.
Since debt is a crucial part of the portfolio for senior citizens, with low appetite for risk, asset allocation would play a major role. PPF, which is a fixed income option used for long-term savings can’t be a standalone wealth creation tool for young earners. Presence of equity investments in your portfolio is needed to beat inflation.
Avoid opting for riskier deposits, as your principal investment amount could be at risk. Any entity offering a rate higher than what is given by small-saving schemes and commercial banks should be thoroughly analysed for risks, and mostly avoided.