Interest rate cuts on small savings, what’s your recourse?

Interest rate cuts on small savings whats your recourse

No one would have expected PPF rates to touch a 40-Year low after it dipped below 8% (Read the article here) following a government notification which lowered interest rates on small savings by 10 basis points or 0.1% starting April 1, 2017 to June 30, 2017 (Click here for notification).

Interest rates on these instruments are reset every quarter based on the prevailing yields on equivalent government bonds. Out of the four quarterly resets in the last one year, three saw a drop in interest rates while one maintained status quo. This secular decline in interest rates has largely been due to the impact of falling inflation rates in the economy.

With most Indians saving their hard earned money in assured returns products like bank deposits and small savings schemes, the big question being asked is “How much more will interest rates fall and what are the alternative options?” As interest rates fall, they need to save more to meet their life time goals. It is a double whammy in cases where the cost of the goal is also rising like say for higher education and also where one depends on interest income for day to day expenses.

While very few had expected such a decline, there is no certainty that interest rates will not fall further. To quote the US example, 10-year US government bonds carried double digit yields in the early 1980’s (10-15%), similar to high interest rates in India in the early 90’s. As the country progressed, interest rates slowly started declining with 10-year yields closing at 6% levels in the 90’s, at 3% levels in 2010 and currently hovering in the 2.5% range.

What are the options available to investors in such a scenario? Options like real estate and gold have lost their sheen in recent years owing to rising ticket sizes and high valuations. Mutual funds are emerging as an alternate investment option with the potential to beat inflation. They not only offer a variety of products based on one’s risk appetite and investment horizon, they also offer convenience and come with a low ticket size of Rs.500 per month besides being well-regulated and highly transparent on disclosures.

Equity mutual funds offer potential for higher returns with historical returns of 16.66% and 12.89%^ over the 5 and 10-year periods ended March 31, 2017. Tax efficiency is another advantage of mutual funds as returns from equity funds after a one year holding period are tax free as per current laws. Further, debt funds offer indexation benefits after 3 years of holding which means that one pays taxes only on returns that are over and above the inflation rate.

Systematic Investment Plans or SIPs are a popular mode of investing in mutual funds at a regular frequency (say monthly). Just like we pay EMI instalments regularly to repay loans, SIPs are like your Good EMI – an investment and not an instalment. One may look at equity oriented mutual funds for an investment horizon of more than 5 years and debt oriented mutual funds for shorter investment horizons. For more details, visit,

^as indicated by the CRISIL-AMFI Equity Fund performance index. Source – CRISIL Mutual Fund Research Tool.


Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its adviser/ tax consultant prior to arriving at any investment decision.

Author: Franklin Templeton Mutual Fund

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