The Government of India has notified changes on the rate of return from various small savings schemes for the April quarter. Not surprisingly, rates across the schemes such as PPF were slashed by large margins. This comes a few days after the Reserve Bank of India hacked the repo rate by a whopping 80 basis points. How does it impact small investors? Let’s understand a few things about these developments.
How Did Coronavirus Impact Interest Rates?
The Reserve Bank of India controls the policy interest rates in its bi-monthly policy review. Taking cognizance of the slowing economy, falling inflation, as well as the economic impact of the coronavirus, the RBI decided to slash the repo rate. The policy rate impacts the interest rate on loans and deposits in the country. Therefore, the rate cut had to impact small saving schemes as well.
Low Interest Rates Aren’t A Calamity
Interest rates need to be seen against bigger picture of macroeconomics. Growth has been slowing. The global economy is going through an unprecedented crisis. Inflation has been slowing. Therefore, interest rates had to come down. High interest rates on fixed income instruments aren’t necessarily an indicator of growth. For example, it isn’t desirable to earn 9% on your deposits while the inflation rate is 10%. Therefore earning 7% while the inflation is around 4% is a much better situation to be in.
Small Savings Still Best Choice For Conservative Investors
Conservative investors prefer assured returns with capital safety. For them, there are no better options than government-backed saving schemes. For example, the returns on PPF are still 7.1% per annum tax-free. In contrast, the fully-taxable returns on bank fixed deposits are now scraping the lower end of 6%. Therefore, these schemes continue to be your best bet for safe, long-term investing. They can help you achieve specific goals in a risk-free manner. For example, PPF is excellent for long-term goals such as retirement savings or children’s education. Sukanya Samriddhi is excellent for your daughter’s education. Senior Citizens Savings Scheme offers one of the best options for the retired. Therefore, the reduction in interest rates shouldn’t deter you from investing in them.
Take Small Risks For Higher Returns
In case you do have a need for higher returns, consider taking small risks in a controlled manner. This will provide you higher long-term returns on a small part of your investment and keep your risks and losses under control. There is ongoing volatility on the stock markets. However, it presents one of the best ways to earn high long-term returns. For beginners, investing in the markets with equity mutual fund SIPs is advisable. You can invest every month in suitable, high-performing schemes to earn higher returns.
The falling rates from small savings are not a cause for alarm. Therefore, keep investing as per your goals. When in doubt, consult an investment advisor.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.