The reduction in interest rates of small savings schemes on Wednesday and then the withdrawal of the order the next day has created a buzz among investors and industry experts. With a huge fall of up to 110 bps in interest rates investors such as senior citizens or retirees were perturbed about their dependence on interest income from small savings schemes such as Senior Citizens Savings Scheme (SCSS), Monthly Income Account for their regular income.
Tax savvy investors were concerned about their contribution to Public Provident Fund (PPF) to avail deduction under Section 80C of the Income Tax Act, at lower interest rates. However, the reversal of the order has not put investors at ease since there is a possibility of the interest rates going down soon.
"The interest rates on small savings schemes should be adjusted downwards in the view of the current interest rate scenario where yields on an average have come down by almost 2 per cent in the last 18 months," says Raghvendra Nath, MD, Ladderup Wealth Management.
The small savings interest rates are administered interest rates and are benchmarked to the government securities of comparable maturity with suitable spread. "Interest rates will come down to boost liquidity as government wants to reduce its interest burden," says Nitin Shahi, Executive Director of Findoc.
The reduction in interest rates of instruments like PPF, Sukanya Samriddhi Yojana, Monthly Income Account, Senior Citizen Savings Schemes could turn out to be beneficial for the financial equity markets and some debt mutual funds. As per Nitin Shahi, investors would be more inclined towards better opportunities with expectation of higher returns which would be possible via equity investments.
Tarun Birani, Founder and CEO, TBNG Capital Advisors says, while PPF continues to be an attractive option for long term retirement-oriented debt savings, investors can look at target maturity (debt) funds with high quality portfolio with five year maturity as an option to look at debt investments.
Some asset management companies including Edelweiss Mutual Fund, IDFC AMC and Nippon Life AMC have recently launched target maturity debt funds with a defined maturity. These schemes passively invest in bonds of a similar maturity constituting the fund's benchmark index. At maturity of the fund, investors are returned their investments. Since these schemes are open ended, there is intermittent liquidity and investors can buy and sell at NAV. Some experts also call the target maturity funds as 'near zero risk' funds.
Small savings schemes for poorer segment
It is well known that apart from middle and lower income groups, higher interest rates of small savings schemes attract a lot of rich investors who take advantage and invest large sums of money in them. Raghvendra Nath suggests that the government should create two slabs in small savings - For small savings of up to Rs 20,000 the rates should be higher, but for large investments the rates should be more aligned to the current market yields.
"So, while the rich investors would get the sovereign assurance, they would not unduly benefit from the generosity of the government that should have ideally been directed towards the poorer segment of the population," Nath adds.
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