Where should you park your cash for short-term needs?

Small savings schemes remain attractive, park in liquid funds for the short term, gain from compounding in EPFO.

Since the last one year, there has been a demand to reduce interest rates on small saving schemes following a 125 basis point reduction in repo rate by the Reserve Bank of India. Finally, the government has reduced interest rate on small saving schemes to align them with bank fixed deposits. So where should you park your cash for short-term needs: post-office time deposits or bank FDs?

Change in rates

  • The govt has reduced the 25 bps spread one-, two- and three-year term deposits have over govt securities of similar maturities
  • The spread for Kisan Vikas Patras and five-year recurring deposits has also been trimmed by 25 bps
  • The new rates are effective from April 1, 2016
  • The compounding of interest for National Savings Certificates and KVPs will now be done annually
  • The rates of Sukanya Samriddhi Yojana (9.2%), the Senior Citizen Savings Scheme (9.3%) and Monthly Income Scheme (8.4%) have not been changed
  • Similarly, interest rates of long-term instruments such as five-year term deposit, five-year National Savings Certificates and Public Provident Fund is same

  • Small savings schemes were linked to the yield on govt bonds in 2011; since then, they have been revised annually by the Central government
  • Because interest rates of small saving schemes were higher, banks could not lower their FD rates further

What you should do?
  • Currently, banks offer an interest rate of 7-8% on 1-3 year FDs. Post office time deposits offer revised interest rate of 8.15%.
  • Though rates have been reduced, short-term post office schemes still give higher return than bank FDs
  • The new 8.15% rate is effective from April 1, 2016. You can lock in your investments at the higher 8.4% rate before that.
  • For short-term needs, you can invest in liquid funds

Employees' Provident Fund
  • Employees' Provident Fund Organisation has increased interest rate to 8.8% from 8.75% last year
  • The raise may be marginal but its tax-free nature makes it one of the best instruments for long-term savings in the debt category

What you should do?
  • Around Rs 22,000 crore lies in EPFO in accounts that have been inactive for 3 yrs, earning no income
  • So if your account too is lying dormant, transfer your funds. Apply online, it not only helps track the status of your application, it also helps EPFO keep a check on employers for settlement of claims.
  • Gain from the power of compounding; do not withdraw from PF needlessly.
Expert view

When comparing investments in fixed interest, look at rate of interest and tax implications for equivalent periods. For short term-up to six months' requirement, a liquid fund may be a better option.

Lovaii Navlakhi, Founder and CEO, International Money Matters


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