Should You Be Holding Small Saving Schemes Amid Rate Cuts?

Now that the interest rates on government-backed small savings schemes including PPF, NSC, KVP are being revised lower quarter on quarter. Here is a take on what should you do as an investor in these financial instruments.

With effect from July 1, government has revised rates lower for all small saving schemes by 0.1%. Rates are revised quarterly in line with yield on government securities in the secondary capital market since April 2016. Barring the rates on savings account of post office, which is kept unchanged at 4%, all other schemes have seen a rate cut this quarter beginning July. PPF, NSC with a maturity of 5 years, KVP will fetch 7.8%, 7.8% and 7.5% respectively.

Sukanya Samriddhi and five-year SCSS or senior citizen saving scheme shall bear 8.3% return while fixed deposit based on the maturity will provide returns anyway between 6.8% and 7.6%. The return on 5-year Monthly Income Scheme will be 7.5%. The 5-year recurring deposit will earn 7.1% interest.

The high return on SSSC of 9.3% earlier got reduced to 8.3% currently, so in case if you are investing or already have invested a substantial amount in these small saving schemes by the government, should you be re-considering your portfolio is the likely question that comes forth amid rate cuts.

Why these rate cuts though small are important?

As per experts, in the current regime, rates on small saving schemes have hit multi-decade lows and it is only in the last quarter that PPF investment, which otherwise drew 8% interest got its return reduced to 7.9% and now in this quarter 7.8%. Small decline in return by 1% point means huge difference over the long run.

Say for instance- You invested a substantial corpus of Rs. 1.5 lakh in a PPF investment 2 years back with similar investment every year for 15 years time, when the return was 8.7% p.a, you would have made an estimate for your maturity value. But with rates declining on the investment, after few years, shall reduce your corpus amount by substantial amount. So, the result shall be that the financial goal for which they have diverted funds in a particular small savings scheme shall fail to meet the desired corpus.

However, as pointed at by experts, if investment in these schemes is done in light of real return in comparison to absolute return, then impact shall not be much. So, those of you who primarily depend on return from these investments of fixed nature or have not considered real rate of return after factoring inflation shall need to reconsider your portfolio.

Investors can go and explore other investment options such as mutual funds that have a low risk profile in comparison to equities. Retired folks can even include debt mutual funds in their portfolio for maintaining returns. Nonetheless, these small saving schemes are still favoured by many due to tax-free return on them.

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