Hidden in the excitement over the interest rate call by RBI, there was something exciting in the monetary policy review speech of RBI governor Urjit Patel. The governor has hinted linking of interest rates of small saving schemes with 10-year G-sec yield. Experts feel that this can prove beneficial for mutual funds.
Currently, the 10-year G-sec yield is hovering around at 6.60-6.70% whereas small savings schemes offer yield between 7.5-8%. Thus, interest rates on small savings products like post office deposits, National Savings Certificate, Public Provident Fund (PPF) and Senior Citizen Savings Scheme may go down making them less attractive for fixed income investors.
In December 2015, the government had proposed streamlining interest rates of small saving schemes with market rates. Since then, the government has been setting and announcing interest rates of small savings scheme every quarter. Though the government has rationalized the interest rates to some extent in these quarterly reviews, they are yet to link interest rates of small savings schemes with 10-year G-sec yield.
With RBI’s governor announcement, the road gets clear for further rationalization in the interest rates of small savings schemes.
G Pradeepkumar, CEO, Union Mutual Fund and Vice Chairman, AMFI is of the view the move may attract inflows in debt mutual funds. “Though MFs don’t guarantee returns, they have the potential to give better risk adjusted returns over medium to long term period. Even today, debt funds have delivered higher returns than small savings scheme. The move will accelerate the growth of fixed income funds.”
Suresh Sadagopan of Ladder7 Financial Advisories believes that investors should now shift to market linked products. “Reducing small savings interest rates is a positive move. The government has signalled investors that there is no such thing called low risk yields high returns. This should nudge investors towards MF fixed income schemes which can offer better returns.”
