The government had linked rates of small savings schemes to yields of government papers of similar maturity in 2016 while announcing the quarterly settings of interest rates.
This hike is a result of the rise in interest rates of government bonds in the recent past.
For 1-5 year time deposit Source: ETIG Database
But is this increase enough? No says the experts. “The repo rate has increased by 50 basis points in the last two revision cycles, whereas the interest rates on small savings have increased only by 40 basis points”, says Adhil Shetty, Co-founder and CEO, BankBazaar.com.
Experts say that it is difficult to guess the next rate hike but it’s unlikely that the rates will come down in the coming quarters. “Being an election year there won’t be any reduction in coming quarters”, says Melvin Joseph, Founder, Finvin Financial Planners. Swapnil Kendhe, a registered investment adviser, concurs with this view. “Next hike is difficult to predict but since interest rates on schemes like PPF are going to move in line with the 10 year yield, investors can remain invested in them,” he says.
Though rate hikes were lower than expected, it comes as a relief to fixed income investors as the rates have remained unchanged for the past two quarters after a reduction in January-March, 2018, quarter. After the hike, interest rates of PPF, Senior Citizen Savings Scheme (SCSS) and Sukanya Samriddhi Yojana (SSY) have come at par with the rates offered by bank fixed deposits.
SCSS will earn 8.7% for senior citizens, whereas tax free schemes of PPF and SSY will get returns of 8% and 8.5%, respectively, becoming an attractive option for long term investing. Experts advice that PPF should be a part of everyone’s investment portfolio. “PPF is risk free, tax free and useful for meeting long term goals like retirement and child’s education,” says Mrin Agarwal, Founder Director, Finsafe and Co-founder, Womantra.
However, investors should note the restrictions on each of these schemes before making a decision. Only senior citizens or those who have retired early between 55 and 60 years of age can invest in SCSS. It also comes with an investment cap of Rs 15 lakh. SSY account, on the other hand, can be opened only in the name of a girl child below 10 years of age and the maximum investment allowed is Rs 1.5 lakh per annum. Other small savings products of time deposits and recurring deposits are taxable and therefore yield much smaller returns, especially for those in the highest tax bracket. If you want to invest in them, you should do so only after 1 October to get higher returns. The interest on these products is fixed at the time of investment so you will be able to book the higher revised rate.
