You and other investors simply love small saving schemes. Small saving schemes like PPF, NSC, Senior citizens saving schemes and Kisan Vikas Patra are very popular, as they give high returns compared to FD's and your money is safe. But, there's a problem. After demonetization, banks were flush with cash, as citizens deposited old 500 and 1,000 rupee notes within the set deadline. Banks cut interest rates offered on savings bank accounts and FD's.
RBI wants banks to reduce loan rates and transfer the benefits of repo rate cuts, to you and other citizens. Banks protested saying, small saving schemes still offered high interest rates and citizens would withdraw money from FD's and invest in small saving schemes. Banks could cut loan rates, only if FD rates were kept low.
The Government obliged by cutting small saving scheme rates. The Government recently cut interest rates on small savings schemes, including PPF and NSC by 20 basis points for the January-March period. PPF and NSC will fetch a lower annual rate of 7.6%.
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You're in a dilemma. PPF and NSC have cut interest rates. You just don't know where to invest your money. Your friends have even suggested that investing in FD's is a great idea.
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1. FD's better than small saving schemes?
Let's take a close look at FD's. The maximum interest offered by FD's for a one year tenure is 7-7.4%. The average return from an FD of one year tenure is 7% a year. The interest you earn from the FD is taxable and you are taxed, as per the income tax bracket you fall under. If you earn interest on FD greater than Rs 10,000 a year, a TDS of 10% is deducted on the interest.
So, after all deductions, the average return from FD's is just 5%. Take a look at small savings schemes. PPF and NSC offer an annual rate of 7.6%. The rate on the five-year senior citizen savings scheme is 8.3% for the three-month period starting from January 1st 2018.
Don't you think small saving schemes offer a higher interest compared to FD's?
SEE ALSO: Why To Invest In PPF?
2. Are mutual funds a good investment?
With both FD's and small saving schemes cutting interest rates, you and other citizens are turning to mutual funds. Many citizens are investing in mutual funds via SIPs. Citizens invested around Rs 6,000 Crores in the month of November through SIPs.
You and many other citizens are investing in equity mutual funds for the first time, with the hope of getting high returns. You must stay invested in equity mutual funds for at least 3-5 years if you want good returns. Equity mutual funds give high returns but at high risk. You must invest in equity mutual funds only if you are willing to bear risk.
Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
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Mutual fund managers believe that just as 2017 was a very good year for mutual funds, 2018 will offer more of the same. There are 2 reasons for this:
1. Many citizens (domestic investors) are investing a lot of money in mutual funds.
2. You and other citizens are investing in mutual funds via SIPs. SIPs are a long-term commitment. You and other investors will continue to invest in mutual funds via SIPs in the New Year 2018.
With the Union Budget 2018-19 just over a month away, the Government is focusing on infrastructure projects and the rural economy. Many mutual fund managers are focusing on the infra-rural-agriculture theme.
Yes, small saving schemes are cutting interest. But, for conservative investors, they still offer good returns. Your money is safe and you earn good returns on your investment. 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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