Small Savings Schemes – Rates get further smaller

Why does bad news get more attention than good news? Not just that, it also triggers us into action.

I realised it yet again when my friend Vijay told me anxiously about a news he just heard.

“Did you read that the government is planning to reduce interest rates on small saving schemes?”

Small savings schemes include National Savings Certificates, Senior Citizen Savings Scheme, Post Office Monthly Income Scheme, PPF, etc.

“Yes, I heard that. But why are you bothered?” I said with my tongue-in-cheek.

“You know everything, yet you ask me that. Almost all my money is in these schemes, in fact most of it in Bank Fixed Deposits. Aren’t my returns going to suffer because of the reduction in interest rates?”

“Vijay, your returns were suffering even when inflation was high and you were earning negative real returns. Your savings dropped since you were paying more for the increased prices. But then, you were complaining about high prices and not your returns or interest rates.

I guess the more important questions that you need to ask is not what is the interest rate but whether your investment portfolio will help you meet your goals.” My voice was a little loud.

He did not look happy with my comment and irritatingly asked “Tell me what do I do?”.

“Relax my friend. We have spoken in the past that your investments have to be tied to your financial goals. All this while you have been blindly putting your money in Bank Fixed Deposits, PPF and NSCs.

Let me repeat myself. The question that you need to consider is would the investment that you make help you meet your financial goals of say your retirement, your kid’s education, your car or a second house. If your answer is yes, then probably you don’t need to bother much. If no, then you need to reassess the way you look at investments.

An investment’s suitability lies in the fact whether it can help you achieve your goal or not. If a Bank FD can take you to a stress free retirement, why not?” I kept my hand on his shoulder.

“I remember you have spoken to me about this before. In any case, I can’t get myself to think beyond Bank Fixed Deposits or PPF. They are just so safe and offer assured returns too. I feel comfortable investing in them. But I feel really bad when the interest rates are messed around with.” Vijay spoke assuredly.

“That’s great. You know what investments suit you. Now, tracking interest rates or stock markets and letting your emotions go up and down in tandem with their movement is not healthy, literally.

Small savings rates have been changing forever. There were times when PPF used to give a 12% return; now it might come down to 7.5 or 8% or it may not change. Similarly, the interest on your Bank FD could also come down by another 0.5%. It’s alright. No point disturbing your inner peace on these movements.

What will give you most peace is knowing that you will live your retirement years without any dependence, that your kid’s will get a decent education and you will be able to afford and enjoy some of the good things in life.

I would still suggest that you should build a financial and investment plan for yourself. It will help you understand how are your cash flows and your investments positioned today to achieve your goals.” I almost had a sense of deja-vu as I said this (one more time).

“You see I have been bothered because almost Rs. 70 lacs has been lying in Bank Fixed Deposits. It is not a small amount.”

“I can totally understand that but you see, a 0.5% cut in interest rate means that yearly you will receive Rs. 35,000 less. The question that you should ask is whether this amount has a power to derail your financial goals? Or, your financial goals will be hampered because you earn only 7.5% (before tax) on your Fixed Deposits. (Post tax, your net return is only 5.2% since you are in the 30% tax bracket.)

That’s the real acid test of your portfolio. You will be better off making a financial plan to guide this effort. And if it tells you that you need to reallocate your investments, that’s what you do.”

“OK, I get it now. It’s high time that I do my financial plan. Tell me when do we begin?” Vijay’s tone was determined.

“How about tomorrow evening? You can till then think about your goals and also collect all relevant information on your investments.”

‘That sounds great. Tomorrow evening it is then. See you.”

Vijay is set to put his financial life and investments onto a better, structured path. But it was triggered by fear. I hope that you, my dear reader, don’t wait for the strike. Be more proactive and take the right steps now.

---

Between you and me: How have you been making your investments so far? Are you big on small savings schemes? Do you have a financial plan or an investment plan?  Are you planning to make one? As always, look forward to your comments.