The government's decision to accept all the major recommendations of the Shyamala Gopinath committee that reviewed the National Small Savings Fund (NSSF) will bring in major changes in the country's canvas of fixed-income securities.
Small savings schemes administered through post offices, including post office time deposits, National Savings Certificates, Senior Citizens' Savings Schemes, the post office Monthly Income Scheme and the Public Provident Fund have been rationalised.
Also, for the first time, interest rates on offer have been made market-linked by benchmarking them to government securities of comparable maturities with the result that investors will earn higher returns on these instruments.
The government, in fact, was left with no choice but to alter the structure of its small savings schemes since market dynamics were breeding investor apathy as their returns were unattractive compared with competing bank deposits. During April-June 2011, the NSSF saw an outflow of Rs 26,542 crore against a net inflow of Rs 13,250 crore during the same period in the previous year, threatening to play havoc with government finances.
The government is still counting its NSSF hit. Much of the money would have found a home in bank deposits. Deposit rates of banks have been moving upwards over the past year on the back of 13 rounds of hikes by the Reserve Bank of India in its benchmark repo rate since March 2010.
Thus, against an earlier interest rate of 6.25 per cent per annum offered for a one-year time deposit with the post office, the average offer from banks was around 9.5 per cent, with the highest rate on offer being 10.5 per cent. After becoming market-linked, the one-year postal deposit rate will yield around 7.7 per cent.
The gap does narrow down somewhat for deposits of higher maturity but banks still have the upper hand. Along with this, the offers on company fixed deposits and non-convertible debentures, which have a mark-up over bank FDs, have also become more attractive. However, interest rates appear to have peaked.
The RBI itself seems jaded at the monotony of rate hikes with Governor D. Subbarao hinting at a pause and a possible reversal of the trend should inflation be brought under control in the coming months. In such a scenario, should you rush to park your money in fixed-income instruments offered by the postal department, banks or companies? How does a debt mutual fund fare among fixed-income instruments? This is what we explore in our cover package in this issue.
Fixed-income investment is a must for any class of investor, though its proportion in one's portfolio should differ depending on age and risk appetite. While fixed-income investment does provide stability to your portfolio, it seldom helps beat the adverse impact of inflation. With headline inflation still hovering well above 9 per cent, the real return on debt might, in fact, be negative. Hence, it is always advisable to create a portfolio spread across diverse asset classes, including equity, commodities and real estate, to stay a step ahead.
SARBAJEET K. SEN