The Prime Minister Narendra Modi, has scrapped 500 and 1,000 rupee notes, effective midnight, November 8th 2016. This is known as demonetization. The scrapped 500 and 1000 rupee notes, will be replaced by new 500 and 2,000 rupee notes. Now the question on your mind….How will the scrapping of 500 and 1,000 rupee notes, affect your investments? What will be its impact on your car loan and home loan?
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In the long term, the mutual fund industry, will benefit from scrapping of 500 and 1,000 rupee notes. Banks will soon reduce the fixed deposit rates. Some banks have already reduced fixed deposit rates. With fixed deposits offering less interest, citizens will shift money to mutual funds, to get returns more than inflation. Investments in mutual fund schemes, will increase. When interest rates are falling in the economy, debt mutual funds do well. Many debt mutual fund schemes, have given more than 2% returns in a week. This could continue for some time.
Good equity mutual funds, invest in fundamentally strong stocks. Stocks with good fundamentals, do well in the long term. With stock markets falling due to demonetization uncertainty, you can invest in good equity mutual funds, at a low price. Expect to get good returns, from your equity mutual funds, in the long term.
Banks are offering low interest on FD’s. Why are banks reducing fixed deposit rates? After scrapping of 500 and 1,000 rupee notes, citizens are depositing money with banks. In fact…banks are getting a lot of deposits from citizens. Most of these deposits are in savings bank accounts. Now banks have a lot of money to lend to you and other citizens. Banks pay very less interest (about 4% a year), on the money you and other citizens, deposit in the savings bank account. With banks having lots of money to lend, they can easily cut interest rates on fixed deposits. Why should the bank offer you and other citizens, high interest on fixed deposits, when they get money easily through savings bank accounts?
If you are a senior citizen, invest money in senior citizen savings scheme (SCSS). Interest rates on SCSS could fall down, but expect higher returns than bank fixed deposits. Small savings schemes like PPF and NSC, are known to give higher returns than bank fixed deposits.
Should you consider tax free bonds? You can invest money in tax free bonds, which give 6% return, with no lock-in period. If you fall in the higher tax bracket, this is an excellent investment. Interest you earn on tax free bonds, is not taxed. However, interest you earn on FD’s is taxed.
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After the scrapping of 500 and 1,000 rupee notes, citizens have lined up to deposit money in banks. Most of this money is deposited in savings bank accounts. Banks pay you only 4% interest on savings bank accounts, per year. For banks, money collected through savings bank accounts, are low cost deposits (they don’t have to pay much interest on them). Now banks have a lot of money to lend.
With banks collecting so much money through savings bank accounts, they don’t really need your fixed deposits. Why should banks pay 7-7.25% a year on FD’s, when they have collected lots of money through SB accounts at 4% a year? Now many banks are cutting interest rates offered on FD’s. This is a positive sign and soon lending rates could go down. With banks paying very little interest to you and other citizens, as most deposits are coming through savings bank accounts, banks can easily lend at lower rates. Expect your EMI’s on car and home loans to go down, in the next 3 to 6 months.
Yes, the Government has scrapped 500 and 1000 rupee notes. It is your duty to find out the impact of demonetization, on your investments and loans. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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