Last Updated on April 1, 2021 at 8:43 am
The finance minister in a tweet announced, “interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn”. Inspite of this readers should reconsider its place in their portfolios.
The reason for the reversal is not hard to guess and as a matter of policy, we shall not delve into those. Consider what today is, meme-makes will have a field day. We would like to point out to readers that PPF and SSY rates are formulae based on paper and we had pointed out a year that it should be lower! See: Worried about 7.1% PPF interest rate? It is higher than what it should be!
We urge readers to view this rate cut and reversal as a glimpse into the future and rework their asset allocation in a goal-based manner. Anyone who is under 40 still has time to do this. We reproduce some recommendation published last night: At 6.4% interest rate does it still make sense to invest in PPF?
Less than 35 years of age: Use this as a wake-up call to first increase equity exposure in your portfolios. At least 40-50% equity is necessary. You can build this by investing less in PPF/VPF. Once this is done, you can also consider including exposure to long-term gilt mutual funds. They come with their own bag of risks but stand a good chance to outperform PPF. See; PPF vs Gilt mutual funds: Which has done better over 15 years? You can increase investments in gilt funds in future.
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35-40 years of age: You have one last chance to implement the above suggestion, but the time available to get used to market risks is too short. So get professional help from a SEBI registered fee-only planner immediately. You will have to bite the bullet, reduced or even stop investments in PPF (other than the min reqd) and do this. Otherwise, you are looking at a guaranteed failure to beat inflation after inflation.
Should I use NPS instead of PPF? Please do not! NPS comes with harsh liquidity conditions (80% locked into a pension plan for exits before 60). You can get the same benefits (and risks) of NPS with a gilt fund.
We still maintain that young earners should not rush to invest into PPF this Aprl. See: Want to invest Rs. 1.5 Lakh in PPF this April? Don’t be in a hurry!
The updated interest rate histories are given here: PPF Interest Rate History 1968 to Present and Sukanya Samriddhi Yojana Interest Rate History 2015 to Present