In a move that should have come as no surprise, but yet did, the government revised the small savings interest rates by 0.4% to as much as 1.3%. Some ‘common men’ using smartphones and high-speed broadband reacted angrily just as they did to Budget 2016 proposals. By the time this is published, I will not be surprised to see another ‘petition’ and another #rollback.
The government has (finally) decided not to allow small saving schemes the luxury of an exorbitant ‘alpha’ over G-sec rates.
Here is the full list of changes.
Official announcement Revision of interest rates for small saving schemes
My understanding is that all those schemes which have fallen by 1% or more will no longer have any alpha wrt G-sec rates. This is the offical announcement: Interest Rates of Small Saving Schemes to be recalibrated w.e.f. 1.4.2016
It is time that fixed income lovers recognise that no one, repeat no one is above market volatility. We all live in a convoluted connected world where interest rates move up and down and the fate of small savings schemes are now more directly connected to the fate of our economy and our equity markets. A healthy sign.
I strongly suggest that we get used to it, because these rates will now be decided each quarter. Therefore, factors like inflation and forex rates will/may have a bigger impact on small savings rates. Fixed income fans will now have to use terms like beta, sigma and XIRR for small saving schemes!
The rate cut has nothing to do with this government. It was inevitable.
Excuse me, but I am filled with fiendish delight to see the 0.6% drop in the Sukanya Samdriti Yojana. I hope the government soon limits the scheme to only those who are eligible for LPG subsidy.
Many thought that SSY was immune even though it was clear enough when scheme opened that rates would be variable. That is the problem with irrational expectations. That is the problem with assuming fixed income is ‘safe’.
That 0.5% extra return above PPF does not make SSY suitable for your child’s education. As mentioned before, use SSY for your retirement instead: Sukanya Samriddhi Yojana vs PPF: An Illustration
The fault dear Brutus, is not in the rates but in our minds. The decrease in rates will not make much of a difference to the final corpus. If your portfolio was fully in fixed income, it would not have beat real inflation in the first place.
er … we need to grow up Blaming this government is childish. Fixed income gains are cyclic too. That is the way the economy works. Our parents have suffered much bigger fixed income crashes in the early 2000s. This is a time to expect growth in the economy.
Realising that the goal is not to take the ‘safe’ path when it comes to building a corpus would help.
The goal is to take a path that has more than decent chance of building an inflation-protected corpus.
Diversification is key. Tax-free small savings schemes are welcome as long as we do not go overboard with them. The exposure should be limited to the extent that the portfolio still manages to beat real inflation levels. Here is an example: Deciding on asset allocation for a financial goal
If your goals are 10 plus years away, consider an exposure to equity via mutual funds. There is no better time than the present -literally.
Rates are going to vary each quarter from now on. Reasonable and subdued expectations have never been more important.
If you are a senior citizen, stick with these fixed income schemes. Do not shift to debt funds or start a SWP in a balanced fund because ‘someone advised you to’. If you are new to mutual funds, now is not the time to experiment with your full corpus.
If you are on the verge of retirement, you can consider some suggestions here: Low interest rate regime: investment options for senior citizens.
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