Popular small-savings instruments become less attractive as returns decline

New Delhi: Two popular small-savings instruments have lost some of their lustre for middle-class Indians already concerned about declining returns on an array of investment avenues and the crash of the stock market in the aftermath of the coronavirus disease (Covid-19) pandemic.

The maturity period on the Kisan Vikas Patra (KVP) has been lengthened by 11 months and the maturity value of the National Savings Certificate (NSC) reduced, according to a notification issued by the finance ministry’s department of economic affairs.

Money invested in KVP in the financial year that started on April 1 will now double in 124 months instead of 113 months earlier.“Maturity period of an account opened on or after April 1, 2020, shall be 10 years and four months. Deposit made in the account shall double on maturity,” the notification said.

Similarly, the maturity value of NSC has been reduced; Rs 1,000 invested in an NSC for a fixed tenure of five years will be Rs 73.05 less at Rs 1,389.49. In the year ended March 31, it was Rs 1,462.54.

Both were popular savings avenues for middle-class investors looking to either save on taxes or build a retirement corpus. The moves come at a time when returns on bank deposits have fallen in line with interest-rate cuts by the Reserve Bank of India aimed at boosting economic growth. The Sensex, the bellwether of the Bombay Stock Exchange, has plunged 26% from its all-time high of 42,273.87 points on January 20, 2020.

“Investors in small savings {instruments} will earn less in returns and the inflation-adjusted returns will [be] further lower. They have to wait longer for their money to double on maturity or build a target corpus/retirement fund. In the case of premature closure, investors will get less due to a downward revision in interest rates,” said Archit Gupta, founder and chief executive officer (CEO) of the financial technology platform ClearTax.

Experts said the government’s move was in line with lower returns on small savings avenues announced by the Union finance ministry for the new financial year.

On March 31, the finance ministry had slashed interest rates on popular small savings schemes such as Senior Citizen Savings, Public Provident Fund (PPF), NSC, KVP, Sukanya Samriddhi Yojana (SSY) accounts, and recurring deposits. Interest rates on NSC and KVP were cut from 7.9% to 6.8%, and 7.6% to 6.9%, respectively.

Given that interest rates on bank deposits are likely to decline even further, the NSC and the KVP still make a compelling case for investments by middle-class households, Gupta said.

“The interest rates on certain savings are higher than bank fixed deposit interest rate, which is around 6% per annum. Also, the government backs these investments. Hence, investors who wish to invest in risk-free securities and for the long-term (five years and above) can park their money in small-savings schemes,” he said.

Pranjal Kamra, the CEO of legal and financial service firm Finology, said the reduction in interest rates would be especially hard on people who have invested in PPF and the SSY, whose accumulated existing balance would earn lower returns.

On March 31, the government had slashed the interest rate on PPF from 7.9% to 7.1% for three months(please check) starting April 1. The new interest rate on the SSY in the first quarter of the current financial year is 7.6%, as compared to 8.4% earlier.

Kamra said the interest rate reduction would upset the plans of those who would retire soon. “For example, the newly retired individual who wants to put his life savings of Rs 10 lakh will earn about Rs 76,080 per annum in comparison to about Rs 88,810 per annum that he could have earned if the changes were not made,” he said.

“Considering the inflation-adjusted return, these instruments seem quite unattractive. However, these would still be a preferred option for individuals who are risk-averse. The reason being better capital protection offered as compared to an FD [fixed deposits] made in an NBFC [non-banking finance company] or private bank,” he added.

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