Spend, Save and Invest Smartly
You love your fixed deposits. For years you took up fixed deposits because of
o Safety of the fixed deposit
o Compounding Returns of the fixed deposit.
For many years, fixed deposits had given you returns in excess of 9% a year. But recently something has happened, which has caused you and your fellow investors, to flee fixed deposits.
RBI had recently cut the repo rates by 50 basis points. To pass on the benefit of the repo rate cut to borrowers, your bank and several other banks, have cut the lending rates. This has reduced interest rates for borrowers of home loans and other loans. If banks reduce lending rates, they are also forced to reduce the interest rate on fixed deposits, they offer you. Banks have cut interest rates on fixed deposits. A 5 year bank fixed deposit in most banks, fetches an interest rate of 7-7.5% a year. This is nothing compared to the 9% a year, Bank fixed deposits offered you and other investors, 2-3 years ago. Now you and other investors are forced to look at other investment avenues. The fixed deposit, no longer gives you the returns you seek.
For the last 2-3 years, you and other investors loved to invest in fixed deposits, because they gave a higher rate of interest than the postal savings schemes.Times are changing now. Higher interest rates offered by small savings schemes like post office saving schemes, are forcing you and other investors, to flee bank fixed deposits.The 5 year post office deposit scheme pays you an interest of 8.5% a year. The 10 year National Savings Scheme pays you an interest of 8.8% a year.This is much higher than the 7-7.5% a year offered by your bank fixed deposits.
Postal saving schemes are safe, just like bank fixed deposits. If you are a senior citizen, you love postal saving schemes, because they are risk free investments. You cannot afford to lose money investing in equity mutual funds, even though you may get a higher rate of return.Postal saving schemes are not only safe, they also give you a higher rate of return, than bank fixed deposits.
If you are a senior citizen, you prefer to invest in post office monthly investment schemes (POMIS), because interest from these schemes, are directly credited online to your bank account. This is quite convenient and free of hassles.
If you invested in the post office savings scheme, you had a lock in of 6 months. You could not touch the money invested for a time period of 6 months.Now you are free to withdraw your money from the post office schemes at any time. If you withdraw your money from the post office saving schemes before a year, you will only get interest at the rate of a savings bank account.
Banks want the Government to reduce the interest paid to investors on small savings schemes. This includes postal saving schemes, public provident fund and the senior citizens savings scheme.This would provide banks a level field to take on post office saving schemes. If this is not done, investors would put their money in post office saving schemes to get higher rates of interest, at the cost of banks. Banks would find it very difficult to raise money to lend to borrowers.
However the Government is reluctant to listen to the banks. Cutting interest rates on small saving schemes is a political hot potato as people in rural areas invest in small saving schemes. This is because they cannot invest in banks as they have few branches in rural areas. A highly unpopular move could affect the Government voter base. If you are an investor in post office saving schemes, you must ride your luck till banks either raise bank fixed deposit rates, or post office savings schemes interest rates fall down.